How the weak ruble affects the Russian economy?

The ruble's devaluation of more than 20% against the USD this year is said to be a double-edged sword for the Russian economy.

In recent months, ruble's price has continuously gone down against USD. Since the beginning of the year, the ruble has depreciated 22% against the US dollar and is one of the three worst performing currencies in the emerging countries.

Earlier this week, there was a time when the ruble hit a 17-month low against the US dollar, when 1 dollar was exchanged for more than 100 rubles. This caused the Central Bank of Russia to hold an emergency meeting, raising the reference interest rate from 8.5% to 12%.

The price of ruble is falling because Russia is exporting less, reflected in the decrease in oil and gas revenues compared to last year. Besides, the country also increased imports, which means that Russians have to sell rubles to get foreign currencies like USD and EUR.

Last year, Russia ran a large trade surplus, thanks to high oil prices and a fall in imports at the start of the war. This helps the local currency to be significantly supported.

But this year, oil prices started going down. Russian oil sales also face more barriers due to Western sanctions, including ceiling prices for crude oil and oil products.

Ruble this year continuously depreciated against USD. Photo: Bloomberg

Imports have also begun to recover after almost a year and a half of hostilities, and the Russians have found a way to adapt to the sanctions. Several new trade routes have been opened with Asian countries not participating in sanctions against Russia. Importers also find a way to buy goods through neighboring countries such as Armenia, Georgia and Kazakhstan.

In addition, Russia also increased spending on defense, pumping money to companies producing weapons. Businesses have to import raw materials.

Ruble reduction is a double-edged sword . The Russian budget benefits when export revenue from US dollars, euros or yuan is converted into rubles more. This will help them have more budget to spend on softening the impact of sanctions.

However, it also makes it more expensive for Russians to buy imported goods, which in turn drives up inflation. Last month, the Bank of Russia forecast inflation to 6.5% this year, in part because of a sharp drop in the ruble.

Another risk of a weakening ruble is that Russia is less attractive to migrant workers, especially from neighboring Central Asian countries. This will be detrimental in the context of Russia's most severe labor shortage in decades.

Weak Ruble is therefore a top concern of Russian officials, as the Kremlin has to deal with rising military costs and find ways to protect its people from the consequences of war.

Analysts say Russia will face many challenges when confidence in the ruble is falling. Russians are still moving money abroad this year. Outflows amounted to $1 billion just days after the Wagner Private Military Rebellion in June, according to data from the Central Bank of Russia.

The current Russian economic situation shows that sanctions have more or less impact on the Russian economy. However, Chris Weafer - CEO of Macro Advisory Partners affirmed that Russia is not in an economic crisis. "The weakening ruble reflects the impact of the sanctions. But it doesn't mean a crisis is brewing," he told the AP.

Government spending is helping the Russian economy perform better than expected. The International Monetary Fund (IMF) last month forecast Russia's economy to grow by 1.5% this year.

Weafer also believes that the exchange rate is almost under the control of the Central Bank of Russia. They can ask major exporters to convert foreign currency sales into local currency. "This weakening is in their plan, but things are going too far and they want to pull back," this expert said.

Janis Kluge, an economist at the German Institute for International and Security Studies, also said that the Kremlin was "not welcome" to the ruble's devaluation. While this is not a full-blown crisis, "it is also the most worrisome economic problem since the beginning of the war," he said.

Although the budget is supported by a weak ruble, increased spending on workers' wages and government pensions will lift inflation. "Anything that gives the impression of a weak or unstable economy is not welcome by the Russian government. In Russia, the exchange rate has always been considered the most important indicator of the health of the economy," Kluge said. know.

Inflation will affect low-income people the most, as they mainly buy necessities, such as food. Traveling abroad will also be more expensive for many Russians.

"Currency fluctuations never bring a good impact. It will affect ordinary people, because the price of everything will inevitably increase," said Dina Solovyova (51 years old) - a veterinarian AP.

Even so, Nikolay Rubtsov - a 20-year-old student - is not very concerned about the falling ruble. "This is only temporary. I think things will return to normal soon. This cannot last," he said.