The Russian Central Bank has imposed a series of emergency measures to control the collapse of the ruble, which has been extremely affected by the imposition of sanctions by the West, following the Russian invasion of Ukraine.
“Truth be told, I would avoid any emotional comments for now,” said Kremlin Press Chief Dmitry Peskov, “what matters is the efforts taken to minimize the consequences,” he told the press conference.
In a few hours, the ruble suffered a drastic fall of more than 20%, so a US dollar that was worth 83 rubles on Friday is now worth 111. Although the Russian currency recovered slightly after the steep fall, the purchasing power of Russians was inevitably affected.
G7 countries agreed to limit Russian banks’ access to international currencies. Up to 75% of the raw materials and processing goods needed to manufacture final goods in Russia are imported from abroad and less than 25% of international trade is transacted in rubles.
Historically, the ruble suffered steep devaluations every time Russia incurred an invasion, however, this drop is the largest. “The fall of the ruble was extremely aggressive and affects all prices that are in ruble with respect to the dollar, so this is extremely complicated for foreign direct investment,” explains commodities and emerging market trader Juan Pablo Figueroa.
“The biggest foreign investment in Russia is Cyprus, that is, the same Russian oligarchs investing in Russia,” Figueroa continues, “the problem consists in the direct investment that was made in oil since December, those people lost all the money. With a 60-70% drop, they are not going to recover that investment in a long time.”
To prevent an even deeper fall of the ruble, the Central Bank of Russia ordered private companies to sell 80% of their foreign currency revenues to buy rubles. It has also banned the sale of shares on the stock market, in order to prevent investors from getting out of them and to avoid the collapse of Russian companies’ shares.
The Russian Central Bank has also doubled interest rates, raising them from 9.25 % to 20 %, an almost unusual move, but which aims to discourage the sale of rubles, raising the profitability of the Russian currency, but making credit more expensive for companies and consumers.
The measures taken by the entity managed to contain the fall of the currency to some extent and at present, the Russian currency trades at 90 rubles to one US dollar. Unfortunately, for Russian citizens, these measures are only temporary, as such a rise makes the cost of credit more expensive for both residents and businesses.
In other words, “Russian citizens will have to pay an interest rate of 20% for purchases made with their credit cards at the end of the month, companies will have to pay higher interest on the loans they have incurred (affecting the profitability of their investments), and Russian families will suddenly have to double the cost of interest on their housing loans,” explains economics professor Guillermo Vélez.
The Russian Central Bank is in a dilemma, as it must decide whether to contain inflation or avoid a recession in the economy. But, the rise in interest rates will prevent the financial body from injecting liquidity into the Russian economy to stimulate its growth.
The situation becomes even more difficult for Russia, as the imposition of sanctions on its reserves by the West means that the Kremlin entity is forced to maneuver without being able to use 100% of its treasury.
The withdrawal of the SWIFT system will also automatically make Russian citizens unable to use their credit cards linked to Amex or Mastercard, so many citizens may be encouraged to withdraw their money from banks.
The government has also stepped in and imposed exchange controls on the nation, meaning that Russians from Tuesday will not be able to hold foreign currency in their bank accounts or create deposits in foreign banks.
“It is a very strict exchange control in response to a very critical situation,” explains Velez, “there was a strong run against the ruble that caused a large drain of reserves and, in a single day, the Central Bank lost $6.2 billion euros.”
In spite of the measures, for Figueroa “the ruble will inevitably depreciate,” since it does not have a third of its reserves, is outside the SWIFT system and cannot export to half of the world. The value of the Russian ruble will end up falling sooner rather than later.
The worst part will be borne by the Russian people, since “in such a conjunctural situation as the current one, people do not buy houses, nor durable goods such as furniture or chairs. All of that is going to fall suddenly, and it will affect the economy a lot, since durable goods are too labor-intensive,” Figueroa concludes.