The Russian ruble has hit its lowest value against the U.S. dollar since the start of the Ukraine war, lowering to 114-to-1 in the beginning of December. Meanwhile, inflation is sky-high, and the prices are hitting consumers hard: butter is so expensive the stores are locking it up to stop thieves.
To reduce volatility in the financial markets, the Russian Central Bank has halted all currency purchases for the remainder of the year. If other measures aren’t taken in the meantime to address the root causes of the depreciation, the downward pressure on the ruble may continue in the new year.
Despite these extreme measures taken, Vladimir Putin and his mouthpiece Dmitri Peskov both dismissed concerns that this is a bad omen for Russia’s economy.
Putin said: “In my opinion, the situation is under control, and there are absolutely no grounds for panic,” attributing the collapse of the ruble to “factors of a seasonal nature.”
While the value of the ruble has declined considerably since the beginning of the war in Ukraine, its value has fallen almost 8% against the U.S. dollar since November 21, when the Biden administration imposed sanctions on Gazprombank, Russia’s third-largest bank, as well as 50 small-to-medium size Russian banks.
What’s So Special About Gazprombank?
For the past two-and-a-half years, the U.S., the U.K., and mainland Europe have imposed a near-constant stream of sanctions on Russia’s financial system and various industries. However many these sanctions may be, a scattering of prominent Russian institutions have gone unscathed due to broader considerations. Until November 21, Gazprombank was one of those institutions, and in fact, the largest remaining financial institution in Russia not subject to U.S. sanctions.
While many of the bank’s industry peers were kneecapped by U.S. regulators eons ago, Gazprombank’s lack of sanctions is widely attributed to the bank’s central role in servicing international payments for Russian natural gas, of which, until recently, Europe was a huge customer.
At the start of 2022, the European Union was importing 40% of its natural gas from Russia, most of it coming from Gazprombank’s parent company, the state-owned energy giant Gazprom. Nations, such as Germany, were joined in strategic partnerships with Russia, having invested billions into building pipelines and infrastructure. Austria imported almost all its natural gas from Russia.
At the onset of the Ukraine war, Europe’s dependence on Russian natural gas was so substantial there was no practical way to quickly sever the relationship without creating an energy crisis and massive collateral damage in Europe.
This dynamic existed likely by Russian design and was certainly something that Putin and company tried to use to their advantage. In 2022, there was menacing talk from the likes of former Russian president Dmitry Medvedev who suggested that Russia would cut off the gas and Europeans would freeze “in their homes” because of their foolish support of Ukraine.
However, that’s not what happened. Instead, two years later, the European Union has replaced over 80% of the natural gas it was importing from Russia. While fears of frozen winters were real, as was the fear of member states closing ranks and protectionism running rampant, trade between the European Union’s 27 members flowed smoothly and new infrastructure was built to facilitate the transport of liquified natural gas (LNG), which does not require Russian pipelines. Alternately, green energy also saw a boom in Nordic states, while coal has become more entrenched in Poland.
In short, the energy landscape has changed. Very quickly. And now, Europe, namely the U.S.’ allies in Europe, are getting along just fine without Russian energy.
Lame Duck
That being, on November 21, President Biden, wanting to secure American support of Ukraine before his successor takes office, made his move, imposing sweeping sanctions on Russia’s third largest bank, Gazprombank, a move which greatly hinders Russia’s access to the international energy market, which in theory, means less money for Russia to fund the war.
If we are to look at the crumbling ruble and inflation, the sanctions appear to be having an effect. However, it remains to be seen if Russia has further, unseen ways of mitigating the restrictions imposed by the sanctions (North Korea anyone?). It also remains to be seen if Trump will keep sanctions in place or take a different tact once in office. Made by an executive order, the November 21st sanctions could be just as easily unmade by an executive order.
It’s been suggested that Trump may hold on to the sanctions to use as leverage in peace talks between Russia and Ukraine. Keeping the sanctions in place hurts Russia. Ditching them hurts Ukraine. Additionally, Trump has championed the export of U.S. liquified natural gas to Europe, which would further minimize Russia’s energy hold on the continent, and put Putin in a tighter spot at the negotiating table. That is, if that’s what Trump wants to do. It’s anybody’s guess how any of this plays out.
Re-enter the Central Bank
Meanwhile, the ruble has cratered 19% against the U.S. dollar this year, 8% in the last two weeks. Inflation, which peaked at 9% in August, remains high. In response, Russia’s central bank, besides halting all foreign currency purchases until 2025, is dumping large amounts of Chinese yuan, in hopes of boosting the ruble and stabilizing the economy.
Inflation has been stubbornly high since Putin repurposed hundreds of thousands of working-age men to fight in Ukraine, an action which depleted the labor market, made wages rise, and subsequently prices, as supply could not meet demand.
In early December, Central Bank Governor Elvira Nabiullina said, ”We are now in unprecedented territory, when almost all production facilities are working at full capacity.”
Indeed, the unemployment rate stands at 2.4%, making the challenge of curtailing inflation that much harder. The central bank is expected to raise interest rates to 23% on December 20th, revisiting highs from twenty years ago. Some have argued this is futile, as already high rates have done little to stem persistent inflation.
As reported previously in Disruption Banking, Elvira Nabiullina of the Central Bank has steered Russia through stormy waters before. But, that was when petroleum was selling at a premium, harder-hitting sanctions had yet to be imposed and the Russian labor market hadn’t been so depleted.
The coming weeks will tell if Nabiullina can do anything to right the ship. The Central Bank cannot raise interest rates much higher, nor can it intervene in the forex market due to its dwindling amount of dollars.
Western economists have been quick to forecast doom and gloom for the Russian economy, but their predictions have not borne out. In fact, the IMF recently revised its forecast for Russian GDP upward to 3.6%.
With President Donald Trump returning to the Oval Office, the Russian economy may have a helping hand to blunt the ruble’s free fall next year.
Author: Laird Dilorenzo
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Laird Dilorenzo is a hatchet thrower and wordsmith.
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organizations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
