The Russian ruble experienced a significant downturn in late November, marking its most substantial decline since the spring of 2022. Within a mere two days, the value of Russian Money Rubles depreciated by 10 percent against both the U.S. dollar and the Chinese yuan. This sharp drop brought the ruble’s total decrease to 20 percent since the beginning of September and nearly 25 percent from its summer peaks. While the exchange rate has since shown some signs of recovery, this volatility underscores ongoing structural challenges confronting the Russian economy, particularly in the realms of labor shortages and production capacity.
The immediate catalyst for this November nosedive was the imposition of fresh U.S. sanctions targeting Russian financial institutions, most notably Gazprombank. Gazprombank, critical for processing payments for Russian gas exports, had previously remained untouched by Washington’s sanctions regime, making it a unique case among major Russian state-owned banks. This latest U.S. action is expected to curtail the inflow of foreign currency into Russia from gas exports, at least until alternative payment mechanisms are established. The news triggered a rush to acquire foreign currencies, and the already constrained nature of Russian currency markets due to Western sanctions amplified the exchange rate fluctuations.
Even Russian authorities acknowledged the impact of these new U.S. sanctions, an unusual admission. The Russian central bank, in a post-plunge report, stated that “the new restrictions on Russian banks required adjustments,” signaling an official recognition of the external pressures affecting russian money rubles.
Beyond these immediate triggers, deeper, long-term factors are contributing to the ruble’s vulnerability. In October, the Russian government relaxed regulations mandating exporters to convert their foreign currency earnings into rubles. The requirement was reduced, allowing exporters to convert only a quarter of their foreign currency earnings, down from the previous half. This policy shift predictably diminished the supply of U.S. dollars and yuan in the market. Simultaneously, demand for foreign currency increased, partly due to a significant surge in state spending during the fourth quarter of 2024, which saw a 1.5 trillion ruble ($14.3 billion) injection. Increased government spending stimulates demand that often outstrips domestic production capabilities, thereby increasing the reliance on imports, which necessitate payments in foreign currencies.
Since Russia’s full-scale invasion of Ukraine and the subsequent suspension of the budget rule—which previously involved Russia selling foreign currency to compensate for shortfalls in energy export revenues—the ruble’s value has become heavily dependent on the balance between imports and exports. Currently, this ratio is not working in Russia’s favor. Russia’s trade surplus has been contracting since the second quarter of 2024. This contraction is driven by falling oil prices, a trend exacerbated by Donald Trump’s U.S. election victory and anticipated policies aimed at boosting U.S. oil production and imposing tariffs, and rising import volumes fueled by an overheated domestic economy.
The loss of traditional Western markets has made Russia’s export revenues increasingly reliant on sales to India and China, particularly for oil. The prices at which these countries are willing to purchase Russian oil are crucial in determining Russia’s export income. As long as the conflict in Ukraine continues, Russia’s options for diversifying and expanding its export markets remain limited.
Furthermore, the increasing sanctions pressure on Russia’s trading partners is inflating operational costs for both Russian exporters and importers. This pressure reduces profit margins for exporters and elevates the costs of imports. Consequently, the demand for foreign currency has intensified, while its supply has dwindled, further weakening russian money rubles.
Historically, a 10 percent depreciation in the ruble typically leads to an acceleration of inflation by up to 0.6 percentage points. Russia began to experience rising prices in the summer of 2023, and this inflationary trend shows no signs of abating. Annual inflation has already reached 8.78 percent and is projected to climb further by year-end, driven by robust household spending during the New Year holidays and sustained high demand for imports. Even the Russian central bank’s aggressive interest rate hikes, currently at 21 percent, have proven largely ineffective in curbing price increases.
Adding to the complexity, rising inflationary expectations among both consumers and businesses are driving increased demand for foreign currency as individuals seek to safeguard the value of their savings by converting them from russian money rubles.
Efforts to redirect consumer demand towards domestically produced goods are hampered by capacity constraints. Elvira Nabiullina, head of Russia’s central bank, has publicly stated that the Russian economy is operating at its peak capacity, leaving little room to significantly increase domestic production. This economic reality implies that a weaker ruble will exert an even more pronounced upward pressure on prices than previously anticipated.
In theory, the central bank could intervene in the market to bolster the ruble, even while maintaining a commitment to a free-floating currency regime. However, viable options are scarce. One potential avenue is to draw upon Russia’s National Wealth Fund, its sovereign wealth fund, but its liquid assets stood at a modest $31 billion at the start of November (excluding gold and less liquid assets). This amount is relatively limited in the context of broader economic challenges.
A substantial interest rate hike by the central bank is another option. However, interest rates are already at elevated levels, and with markets anticipating further increases in December, the central bank would need to implement a dramatic rate increase—possibly as high as 8 percentage points in a single move—to ensure a meaningful impact. Such a drastic measure would severely impact the non-military sectors of the economy, which are already on the brink of stagnation, and could also negatively affect the critical defense industry.
In response to the ruble’s recent sharp depreciation, Russian officials have resorted to verbal interventions aimed at calming market panic, and the central bank has temporarily suspended its foreign currency purchases in the domestic market. It is also plausible that the Kremlin has informally requested exporters to sell foreign currency holdings, a tactic employed during the 2014 ruble crisis, although this remains unconfirmed.
These measures, while lacking in innovation, have temporarily arrested the ruble’s decline. However, the respite is likely to be short-lived.
The fundamental factors underlying the weakness of russian money rubles persist. Russia’s current trade dynamics suggest that the currency is likely to face continued downward pressure, and inflationary pressures are expected to intensify. As the Russian economy decelerates despite substantial government spending, the trajectory of the ruble exchange rate points towards a scenario of stagflation—a detrimental combination of economic stagnation and rising prices. The root cause of these economic challenges is the ongoing war in Ukraine, coupled with the ensuing Western sanctions and the increasing militarization of the Russian economy. Russia’s financial authorities are constrained in their ability to resolve these deep-seated issues and are, notably, hesitant to publicly address the full extent of the problem.
