Russian ruble is flying into the abyss as Russian economy is hit by new sanctions

New U.S. sanctions hit the Russian economy—the ruble is rapidly devaluating, channels for foreign currency inflows are shrinking, and the Kremlin can’t fix the situation.

Ruble collapses more than 24%

The Russian ruble weakened further against the dollar and the Chinese yuan this week. The ruble has fallen 16% against the U.S. dollar since the beginning of November.

On November 27, 1 dollar costs 113 rubles, while on November 2 the rate was 97 rubles, Reuters reported. The currency has fallen more than 24% since early August.

The ruble’s fall has been compounded by a more than 20% drop in the stock market this year as investors shift their savings from stocks to deposits that offer interest above the central bank’s 21% prime rate.

The falling ruble is spurring inflation to exceed Russia’s central bank’s forecasts for 2024, which runs counter to the regulator’s painful tightening of monetary policy: the benchmark interest rate is at its highest level since 2003.

The central bank estimates that a 10 percent weakening of the ruble adds 0.5 percentage point to inflation, meaning a four-month drop in the ruble could add 1.5 percentage points to the current inflation rate.

New U.S. sanctions against 50 Russian banks

The Russian economy is facing another major blow. New U.S. sanctions imposed on November 21 against 50 Russian banks have effectively cut the country off from part of the world’s financial flows, causing the ruble to plummet, Bloomberg reported.

One of the key targets of the new sanctions was Gazprombank, which plays an important role in international payments for Russian gas exports. The restriction of its operations has seriously complicated the work of Russian exporters.

Experts note that against the backdrop of tightening sanctions pressure, market participants are buying up foreign currency en masse in an attempt to make urgent payments. The U.S. pressure on friendly countries that aid the Kremlin in circumventing sanctions exacerbates Russia’s problems. Washington is threatening those who continue to work with Russian financial institutions with secondary sanctions. 

As a result, many direct payments with Russia’s main trading partners have stopped. Russia, however, continues to conduct foreign trade through intermediaries, mostly with payment in rubles. However, analysts warn that the new restrictions will further complicate such transactions and deprive Russia of incentives to attract foreign currency liquidity.

Analysts predicted ruble’s collapse

Many analysts predicted that the ruble could hit 115-120 by the end of the year, and some called on the government and the central bank to take measures, such as forcing exporters to sell more currency and reducing government purchases of foreign currency.

The ruble’s fall has been exacerbated by new sanctions on Russia’s financial sector, which have disrupted foreign trade payments, especially for oil and gas, creating a physical shortage of currency on the Russian market, analysts said.

Most major Russian banks are now under U.S. sanctions and therefore cannot conduct banking transactions in dollars, and the only option for them to trade currency remains importing large amounts of cash dollars.

Ruble plunges to lowest rate since the beginning of the war

The value of the Russian currency has not been this low since March 2022. In the midst of international restrictions imposed on Russia due to its full-scale aggression against Ukraine, the value of the Russian national currency plummeted to 121 rubles per dollar.

The ruble exchange rate began a free fall after the Nov. 5 U.S. presidential election and accelerated amid new U.S. sanctions, under which Gazprombank, the third-largest bank in Russia in terms of assets, fell. It was the last of the major Russian banks to retain access to the SWIFT payment system and was the “hub” for gas settlements with Europe.

Many analysts emphasized that, apart from a new round of tensions with the West over Russia’s war against Ukraine and new financial sanctions, there were no fundamental reasons for the fall, and oil prices, Russia’s main export, were generally stable.

A weak ruble benefits Russia’s exporting companies

The Kremlin has not yet taken decisive steps to remedy the situation. Meanwhile, the Russian economy, dependent on energy exports and international financial ties, is facing a growing crisis.

A weak ruble benefits exporting companies because Russian energy prices are mostly set in dollars. It also helps the Russian government to increase budget revenues from energy taxes and export duties.

This crisis shows that U.S. sanctions are becoming increasingly painful for Russia, limiting its ability to conduct foreign trade and exacerbating domestic economic problems.