The Russian rouble experienced a significant downturn in late November, marking its most substantial depreciation since the spring of 2022. Within a mere 48 hours, the rouble’s value plummeted by 10 percent against both the U.S. dollar and the Chinese yuan. This sharp fall extended the currency’s decline 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, the underlying issues contributing to the weakness of Rouble Money persist, posing a structural challenge to Russia’s economic growth, alongside existing pressures like labor shortages and constrained production capacity.
The immediate catalyst for this November’s dramatic plunge was the imposition of U.S. sanctions targeting Russian financial institutions, notably Gazprombank, a state-owned entity. Gazprombank had, until this point, remained a crucial channel for international payments for Russian gas exports and notably, the only major Russian state bank to avoid Washington’s sanctions. The U.S. action effectively curtailed the inflow of foreign currency into Russia from gas sales, at least until alternative payment mechanisms can be established. The news triggered a rush to acquire foreign currencies, and the already limited liquidity in Russian currency markets, a consequence of Western sanctions, amplified the exchange rate volatility in response to this sudden shift.
Even Russian authorities acknowledged the impact of these latest U.S. sanctions, an unusual admission. The Russian central bank, in a post-plunge report, conceded that “the new restrictions on Russian banks required adjustments,” highlighting the direct effect of the sanctions on the rouble money market.
However, the rouble’s troubles are not solely attributable to immediate shocks. Longer-term policy decisions are also at play. In October, the Russian government relaxed regulations mandating exporters to repatriate foreign currency earnings. Exporters were permitted to convert only 25 percent of their foreign currency revenue into roubles, down from the previous 50 percent requirement. This predictably led to a reduction in the supply of U.S. dollars and yuan within the Russian market. Simultaneously, demand for foreign currency increased, fueled in part by a significant surge in state spending. Government expenditure in the final quarter of 2024 saw a substantial 1.5 trillion rouble ($14.3 billion) increase. This fiscal expansion stimulates demand that outstrips domestic production capacity, thereby driving up import needs, which must be settled in foreign currencies, further pressuring rouble money.
Since Russia’s full-scale invasion of Ukraine and the subsequent suspension of the budget rule that had previously stabilized the rouble by requiring foreign currency sales to offset energy revenue shortfalls, the rouble’s value has become primarily determined by the balance between imports and exports. This trade balance is currently unfavorable to Russia. Since the second quarter of 2024, Russia’s trade surplus has been contracting. This contraction is driven by two key factors. Firstly, global oil prices have been trending downwards, a trend exacerbated by Donald Trump’s U.S. election victory and anticipated policies aimed at boosting U.S. oil production and potentially imposing tariffs. Secondly, imports have been on the rise due to heightened demand in an economy showing signs of overheating.
With the loss of traditional Western markets, Russia’s export revenue is now heavily reliant on sales to India and China, specifically their willingness to purchase Russian oil and the prices they are willing to pay. As long as the conflict in Ukraine continues, Russia’s options for diversifying or expanding its export markets remain limited, leaving rouble money vulnerable to shifts in these key trading relationships.
Adding to the pressure on rouble money, sanctions targeting Russia’s trading partners have elevated operational costs for both Russian exporters and importers. This has squeezed exporter profits and inflated import costs. Consequently, the demand for foreign currency has risen while its supply has diminished, creating a persistent downward pressure on the rouble.
Historically, a 10 percent depreciation in the rouble typically adds up to 0.6 percentage points to inflation. Russia began experiencing accelerating price increases in the summer of 2023, and inflationary pressures show no signs of abating. Annual inflation has already reached 8.78 percent and is projected to climb further by year-end, spurred by robust household spending during the New Year holiday season and sustained import demand. Even the Central Bank’s aggressively high interest rate of 21 percent appears to be having limited success in curbing price growth, underscoring the deep-seated nature of the inflationary challenge facing rouble money.
Furthermore, rising inflation expectations among both consumers and businesses are contributing to increased demand for foreign currency as individuals seek to protect the value of their savings by converting them from roubles. This self-reinforcing cycle further weakens rouble money.
Attempts to redirect consumer demand towards domestically produced goods are proving futile. Elvira Nabiullina, head of Russia’s central bank, has stated that the Russian economy is operating at its production limits, implying little capacity to significantly increase domestic output to meet demand and alleviate pressure on rouble money. This supply constraint means that a weaker rouble will have an even more pronounced inflationary impact than in the past.
In theory, the Central Bank could intervene in the currency market to support the rouble, even while adhering to a free-floating exchange rate policy. However, viable options are scarce. One potential avenue is to draw upon the National Wealth Fund, Russia’s rainy-day reserve. However, at the beginning of November, this fund held a relatively modest $31 billion (excluding gold and illiquid assets), offering limited firepower for sustained currency intervention to bolster rouble money.
A substantial interest rate hike by the Central Bank is another possibility. But interest rates are already at very high levels, and with markets anticipating further increases in December, the Central Bank would likely need to implement a dramatic rate increase, potentially as high as 8 percentage points in a single move, to effectively stabilize the rouble. Such a drastic measure would severely impact the non-military sectors of the economy, which are already bordering on stagnation, and could also negatively affect the crucial defense industry, creating a difficult policy trade-off regarding rouble money.
In response to the rouble’s sharp depreciation, Russian authorities have primarily resorted to verbal interventions aimed at calming market panic. The Central Bank has also temporarily suspended its foreign currency purchases in the domestic market. It is also plausible that the Kremlin has, as it did during the 2014 rouble crisis, made informal requests to exporters to sell foreign currency holdings, though definitive confirmation is lacking.
These measures, while lacking in innovation, have temporarily arrested the rouble’s freefall. However, the respite is likely to be short-lived.
The fundamental factors driving the weakness of rouble money remain unaddressed. Russia’s trade dynamics suggest a continued trajectory of currency depreciation and rising inflation. As the Russian economy decelerates despite substantial government spending, the rouble’s exchange rate movements indicate a growing risk of stagflation – a damaging combination of economic stagnation and escalating prices. The underlying cause is the ongoing war in Ukraine, coupled with the resulting Western sanctions and the increasing militarization of the Russian economy. Russia’s financial authorities lack effective tools to resolve this fundamental dilemma, and the political sensitivity of the issue further complicates finding viable solutions to stabilize rouble money.
