In a bid to stave off red-hot inflation, Russia’s central bank halted all foreign currency purchases for the remainder of the year, while actively selling Chinese yuan, in hopes of propping up the ruble. The ruble—currently worth a fraction of a penny—hit lows on Wednesday not seen since the start of the Ukraine war.
The aim is to put a floor underneath the ruble and clamp down on further price pressure leaking into the country through the rising cost of imported goods. The Russian economy is also suffering from a lack of foreign investment caused by Western government sanctions that ban companies from doing business with Russia. With most Russian financial institutions now cut off from trading in dollars, this starves the country of a steady supply of U.S. currency reserves.
“This decision is aimed at reducing volatility in financial markets,” the Bank of Russia said on Wednesday.
Official inflation rates hit a year-on-year peak above 9% percent in August, and continue to remain elevated. Russian political scientist Kirill Rogov believes these figures are likely understating the problem and actual rates could be materially higher, citing data from Raiffeisen Bank analysts and market research firm ROMIR.
The central bank’s announcement came one week after the U.S. government imposed fresh economic sanctions against Gazprombank. The bank had previously been exempt, since it plays a vital role enabling the export of natural gas to a handful of American allies in Europe by processing cross-border payments.
On Wednesday, the ruble consequently fell below the rate of 114 to a dollar, the lowest level since early March 2022. The Moscow daily Rossiyskaya Gazeta called it a “panic attack for Russia’s currency market.”
Finance minister Anton Siluanov argued the plunge will benefit exporters, whose goods are suddenly much cheaper for foreigners to buy. But the risk is a weak ruble will only end up importing inflation from abroad by driving up prices of imported foreign goods.
Inflation began ramping up in Russia after president Vladimir Putin directed hundreds of thousands of working age men to fight in Ukraine and marshalled Russia’s industry to support its military objectives. With fewer workers available, wages in the civilian economy rose sharply. Rising labour prices were quickly passed on to consumers as supply struggled to meet domestic demand.
“Never before has unemployment been as low as 2.4%,” central bank governor Elvira Nabiullina told lawmakers at the Russian Duma earlier this month. “We are now in unprecedented territory, when almost all production facilities are working at full capacity.”
