The Russian authorities are working hard to control the market panic caused by the sharp decline in the ruble, and the central bank intervened on Wednesday (November 27th) to support the domestic currency.

Ruble Crisis and Central Bank Intervention

On Wednesday, the RUB/USD exchange rate fell to 114, hitting its lowest level since March 2022. This level coincides with the period of international economic sanctions triggered by Russia's invasion of Ukraine. In response to the sharp decline in the ruble, the Russian Central Bank (CBR) announced that it will suspend foreign purchases in the domestic currency market for the rest of this year to "reduce financial market volatility". After the intervention, the ruble against the US dollar rebounded to 110 on Thursday morning.

Putin stated that there is no need to panic about the depreciation of the ruble. He attributed the fluctuations in the ruble to budget payments and seasonal changes, emphasizing that the situation has been brought under control. Kremlin spokesman Dmitry Peskov also believes that the depreciation of the ruble has limited impact on the lives of ordinary Russians, as wages are paid in rubles.

Downward economic pressure and escalation of sanctions

However, analysts warn that the sharp depreciation of the ruble is a signal of the deterioration of the Russian economy. Timothy Ash, emerging market strategist at BlueBay Asset Management, described the ruble as "in free fall" and believes that Russia may be facing a currency crisis. The depreciation of the ruble not only means an increase in inflation, but also forces the central bank to further raise policy interest rates, thereby suppressing real GDP growth.

The sharp drop in the ruble is partly attributed to the new round of sanctions imposed by the United States on Gazprom last week. These sanctions have restricted the bank's ability to process transactions related to the US financial system, further impacting Russia's economic activities. In addition, the domestic economy is also under pressure due to the soaring inflation caused by the war. Despite the central bank raising interest rates to 21%, the inflation rate in October still reached 8.5%, and basic food prices continued to soar.

Structural problems in the economy are becoming apparent

Although the Russian economy continued to grow during the war, benefiting from energy exports to specific countries, its growth has shown signs of fatigue. The International Monetary Fund predicts that the Russian economy will grow by 3.6% in 2024, but the growth rate will drop to 1.3% in 2025. Institutions believe that this mainly reflects a decline in private consumption and investment due to the easing of labor market tension and a slowdown in wage growth.

Continuous observation and future challenges

Analysts point out that the dual impact of international sanctions and economic weakness is pushing Russia to the brink of an economic crisis. RSM US Chief Economist Joseph Brusulas warns that the long-term effects of sanctions are becoming apparent, and the Russian economy is consuming resources for its war effort. Although the central bank's suspension of foreign exchange purchases can temporarily stabilize the market, the fundamental problem remains unresolved.

Maxim Reshetnikov, the Minister of Economic Development of Russia, insisted that the fluctuation of the ruble exchange rate is not related to "fundamental factors", but is affected by the appreciation of the US dollar and the intensification of sanctions. He is optimistic that currency market volatility will gradually subside, but economic observers believe that the Russian economy may face greater challenges under sustained pressure.