The Russian ruble has fallen to its lowest level against the US dollar since the start of its full-scale invasion of Ukraine, which could be the result of new US sanctions and the latest sign of a struggling economy during the war.
Russia's central bank said on Wednesday it would freeze foreign currency purchases for a year after the ruble weakened past 110 rubles to the US dollar, down by a third since early August.
“The decision was made to reduce the volatility of financial markets,” the regulator said in a statement.
The fall in the ruble comes days after the US on Thursday sanctioned Russia's third-largest bank, Gazprombank, and its six foreign subsidiaries, which handle most foreign payments for natural gas exports.
The previous rounds of sanctions saved Russian gas because the European economy was heavily dependent on it, but European countries have lined up other things and are now less dependent on Russian gas.
The US treasury and state departments said last week the new sanctions “will make it more difficult for the Kremlin to circumvent (existing) US sanctions and fund and arm its military.”
Canada and the United Kingdom have previously sanctioned Gazprombank.
Dmitry Pyanov, deputy CEO of Russia's second-largest bank VTB, told Reuters that US sanctions on Gazprombank could have a “significant impact” on the ruble “as it has ceased to be a channel for delivering foreign currency to the Moscow Exchange.”
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Russia's finance minister, Anton Siluanov, told a financial conference in Moscow this week that a weak ruble is “very attractive” to foreign investors – suggesting the Kremlin may be content to let the exchange rate fall.
Russia published new economic data on Wednesday highlighting the latest signs of overheating in an economy that has been retooled to fight the war in Ukraine, which has put workers out of work.
Real wages rose 8.4 percent in September in annual terms, unemployment fell to a record low of 2.3 percent in October, and weekly inflation stood at about 0.4 percent.
Headline inflation remains stubbornly low at around eight percent – twice as high as the central bank's target.
The bank last month raised its interest rate to 21 percent in a bid to rein in inflation, but heavy government spending on the military and struggling workers has made it difficult.
“One of the things that causes inflation is that they pay people a lot of money to go to war, to recruit them,” said Lisa Sundstrom, a political science professor at the University of British Columbia who studies Russia, in Global. News.
“Even in domestic industries, they have to pay people high wages because there is a shortage of workers.”
The fall of the ruble could further fuel inflation, according to central bank estimates that predict that a 10 percent inflation rate adds 0.5 percentage points to the economy.
That means a four-month fall could add 1.5 percent to current levels.
“For the central bank, it represents a challenge in the fight against inflation,” economist Evgeny Kogan told Reuters.
Chris Weafer, CEO of the Macro-Advisory Ltd. consultancy, told The Associated Press last month that the recent interest rate hike was “not a cry for help, but a scream of pain” from regulators.
Independent Russian economists have said the economy is heading into a period of “stagflation” – a combination of high inflation and low growth.
More than a third of next year's budget has been allocated to the military and industrial sector as Moscow continues to press ahead with its war in Ukraine.
Sundstrom said it could be an economic “catastrophe” if the war ends and that money stops flowing.
“It's not like business will come back quickly, I would have thought,” he said, adding that some oligarchs and business leaders who have chosen to stay in Russia since the invasion began have begun to complain about the current economic situation.
“At the same time, when the war ends, what will you do with all those soldiers who are paid these huge sums of money?” he asked. “Are you just trying to keep paying them?”
– via files from Reuters and the Associated Press
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