The Russian currency has fallen to its lowest level against the US dollar since March 2022, amid rising tensions with the West and a weakening economy. President Putin’s economic adviser blamed the central bank for its loose monetary policy, while the bank defended its actions as necessary to curb inflation.
Kremlin wants a strong rouble
The rouble slid past 100 per U.S. dollar on Monday, reaching 100.9950 at one point, its weakest point in almost 17 months. The currency has lost around 30% of its value against the dollar since Putin sent troops into Ukraine in February 2022, sparking international sanctions and a diplomatic crisis.
As the rouble tumbled, Putin’s economic adviser Maxim Oreshkin said in an op-ed for the TASS news agency that the Kremlin wanted a strong rouble and expected a normalisation shortly, an intervention that could spur the central bank into action ahead of its next scheduled interest rate decision on Sept. 15.
“A weak rouble complicates the economy’s structural transformation and negatively affects the population’s real incomes,” Oreshkin wrote. “It is in the interests of the Russian economy to have a strong rouble.”
Oreshkin also criticised the central bank for its loose monetary policy, saying that it was the main reason behind the rouble’s weakening. He argued that the bank should have raised interest rates more aggressively to support the currency and curb inflation, which hit a six-year high of 8.5% in July.
Central bank defends its policy
The central bank, however, defended its policy, saying that it was acting in accordance with its inflation-targeting mandate and that it had taken measures to reduce exchange rate volatility.
The bank said that the rouble’s sharp slide this year was mainly due to Russia’s shrinking balance of trade, as imports grew faster than exports amid a recovery in domestic demand. The country’s current account surplus was down 85% year-on-year in January-July.
The bank also said that it had halted the finance ministry’s foreign exchange purchases last week, effectively abandoning its budget rule, to try and stabilise the market. The budget rule requires the government to save excess oil revenues in a sovereign wealth fund and buy foreign currency when oil prices are above a certain level.
The bank added that it was ready to raise interest rates further if needed to bring inflation back to its 4% target. The bank has already hiked rates five times this year, from 4.25% to 6.5%, but analysts say that this has not been enough to stem the rouble’s decline.
Analysts expect more pressure on rouble
Analysts expect more pressure on the rouble in the coming weeks, as geopolitical risks remain high and oil prices, Russia’s main export, are volatile.
Russia is facing growing criticism from the West over its involvement in Ukraine, where fighting has intensified in recent months. The US and its allies have threatened to impose more sanctions on Russia if it does not withdraw its troops and respect Ukraine’s sovereignty.
Russia is also facing challenges from China, its largest trading partner, which has been accused of cyberattacks and human rights abuses. China is also competing with Russia for influence in Central Asia, where both countries have strategic interests.
Oil prices, meanwhile, are subject to fluctuations due to supply and demand uncertainties amid the COVID-19 pandemic. Oil prices have risen above $80 per barrel this year, but have also fallen sharply at times due to fears of a slowdown in global growth.
Analysts say that Russia could reintroduce tougher capital controls or raise interest rates more sharply to support the rouble, but both options have drawbacks. Capital controls could deter foreign investors and hurt economic growth, while higher interest rates could increase borrowing costs for the government and businesses.