The recent fluctuations in the value of the Russian ruble have brought to light a weakness in President Vladimir Putin’s tightly controlled economy.
However, the Kremlin’s economic team was quick to address this vulnerability by implementing an emergency interest rate increase, which temporarily stabilized the currency.
Nonetheless, this solution merely conceals the underlying predicament faced by the Russian economy: how to finance the military without jeopardizing the national currency and causing detrimental inflation that could have political repercussions.
Despite the extensive sanctions imposed due to the conflict in Ukraine and the withdrawal of numerous prominent Western companies, life in Moscow appears relatively unaffected, maintaining an outward appearance of normalcy.
The atmosphere on Bolshaya Nikitskaya street is undeniably vibrant, as evidenced by the bustling outdoor seating areas at various restaurants and bars.
On a recent evening, the street was teeming with well-dressed locals, taking full advantage of the delightful August weather.
The air was filled with the infectious energy of laughter and conversation, accompanied by the booming beats of DJs emanating from a nearby courtyard eatery.
As one strolls along this popular street, it becomes apparent that change is afoot. While the grand façades of the malls remain unchanged, a closer inspection reveals a subtle shift in the retail landscape.
Once home to well-known fashion giants such as Zara and H&M, these familiar names have made way for emerging clothing brands like Maag and Vilet, offering shoppers a fresh and exciting range of options.
Krunchy Dream, the doughnut seller located in Evropeisky mall, bears such a striking resemblance to the former Krispy Kreme that once occupied its spot that it could easily be mistaken for its predecessor.
Not only does the establishment share a similar branding, but it also exudes a sense of nostalgia for those who were fond of the previous doughnut haven.
However, one notable difference between the two is the absence of Apple Pay at Krunchy Dream. Instead, the establishment has collaborated with various banks to offer customers stickers embedded with a chip that facilitates mobile payment.
This innovative solution ensures that customers can conveniently make their purchases without the need for traditional payment methods, enhancing the overall shopping experience at Krunchy Dream.
The current state of the economy in Russia is characterized by key economic gauges that are within normal ranges.
Unemployment rates are low, indicating a relatively stable job market, while economic growth has surpassed expectations, reflecting a robust and resilient economy.
Inflation, though moderate by Russian standards, stood at 4% in July, which poses challenges for individuals with limited incomes.
This economic backdrop has elicited a mixture of unease and resignation among the people of Moscow, where voicing criticism of the military can lead to imprisonment.
To protect their identities, some individuals only provided their first names when expressing their opinions.
Amidst this atmosphere, Vladimir Cheremesyev, a 68-year-old retiree, recalled the troubles that followed the collapse of the Soviet Union in 1991, noting that the current economic stability has managed to delay similar challenges for several years.
Cheremesyev, a pensioner, expressed his lack of concern regarding his income, despite the fact that it is not substantial.
However, he did mention feeling anxious at times, which has led to an increase in his blood pressure. This sentiment was echoed by others who observed the constant fluctuations in prices.
Yuliana, a 38-year-old entrepreneur, expressed deep concern over the sharp deterioration of their financial situation, stating that it will not be resolved in the immediate future.
She even went so far as to suggest that future generations will bear the burden of the current economic situation. Businesses in need of supplies have had to seek alternative sources.
Andrei Lavrov, the owner of the Smile Atelier dental clinic, has resorted to importing sutures and silicone from Asia due to the high demand for these materials in his practice.
Despite concerns, no major disaster has occurred in Russia due to the disruption in supplies. The unavailability of certain items has been easily compensated for by alternative channels.
Furthermore, the local industry has stepped up its production to fill the gaps, offering high-quality substitutes for the Russian-made sutures.
While imports have been affected by sanctions, they are gradually recovering as goods are being routed through neighboring countries like Kazakhstan and Armenia.
The government’s increased spending on military and social programs has injected cash into the economy, benefiting both individuals and businesses.
This surge in cash flow has led to an increase in the purchase of imported products. Additionally, labor shortages resulting from people leaving the country have inadvertently supported higher salaries, while government-subsidized mortgages have helped sustain real estate activity.
Although the auto industry has suffered due to Western manufacturers pulling out of Russia, Chinese vehicle imports have been gaining traction.
Overall, while the economy has faced certain setbacks, it has managed to adapt and find alternative solutions to mitigate the impact.
The cost and accessibility of foreign travel pose significant challenges, as the expenses involved are often exorbitant and exacerbated by visa restrictions and airline bans.
This predicament is particularly burdensome for individuals with modest incomes, who are unable to even contemplate embarking on such journeys.
Moreover, the privileged elite, as has been the case throughout history, continue to navigate these obstacles with relative ease, unaffected by financial constraints.
In addition to grappling with the complexities of international travel, Russia, a major global oil supplier, finds itself contending with the repercussions of Western sanctions, which have resulted in diminished revenue from oil sales.
Consequently, the country’s trade surplus with the rest of the world has contracted, as Russian citizens and businesses increasingly turn to foreign markets to satisfy their consumption needs.
Traditionally, a trade surplus, wherein exports outweigh imports, bolsters the value of the ruble. However, the diminishing surplus has precipitated a steady decline in the currency’s worth.
Paradoxically, this devaluation has proven advantageous for the Russian government, as it enables them to meet their financial obligations with greater ease.
By exchanging dollars earned from oil sales for a larger quantity of rubles, the government can allocate more funds towards essential expenditures such as government agencies, workers’ wages, and pensions.
Nevertheless, the ruble’s depreciation has exceeded the Kremlin’s comfort zone, falling below the psychologically significant threshold of 100 rubles to the dollar on August 14th.
This prompted the central bank to implement an emergency measure in the form of an interest rate hike of 3.5 percentage points, aimed at curbing domestic demand for imported goods.
The immediate effect of this intervention was a temporary resurgence in the ruble’s value, with the currency reaching 92 to the dollar in the days following the rate hike.
However, since then, the ruble has experienced a gradual decline and currently stands at 95.5 to the dollar as of Tuesday.
The current exchange rate, although weaker compared to last year’s levels of approximately 60 rubles to the dollar, does not pose an immediate crisis.
However, it is crucial to prevent a freefall scenario in order to maintain stability in the economy. The decline in the exchange rate raises concerns and warrants close monitoring, as a significant drop could have adverse effects on various sectors, including trade, investment, and inflation.
It is essential for policymakers to implement measures that promote confidence in the currency and ensure that the exchange rate remains within a manageable range.
By adopting a proactive approach and implementing appropriate policies, the authorities can mitigate potential risks and maintain a stable economic environment.
The current exchange rate, although weaker compared to last year’s levels of approximately 60 rubles to the dollar, does not pose an immediate crisis.
However, it is crucial to prevent a freefall scenario in order to maintain stability in the economy. The decline in the exchange rate raises concerns and warrants close monitoring, as a significant drop could have adverse effects on various sectors, including trade, investment, and inflation.
It is essential for policymakers to implement measures that promote confidence in the currency and ensure that the exchange rate remains within a manageable range.
By adopting a proactive approach and implementing appropriate policies, the authorities can mitigate potential risks and maintain a stable economic environment.
The current exchange rate between the ruble and the dollar has weakened compared to last year’s levels, where it stood at approximately 60 rubles to the dollar.
While this depreciation does not present an immediate crisis, it is imperative to take precautionary measures to prevent a freefall scenario that could destabilize the economy.
The decline in the exchange rate has raised concerns among experts and policymakers, as a significant drop could have far-reaching negative consequences for various sectors of the economy.
One of the key areas that could be affected by a further decline in the exchange rate is international trade.
A weaker ruble makes imports more expensive, which could lead to a decrease in the volume of imported goods and services.
This, in turn, could impact domestic businesses that rely on imported inputs for their production processes.
Additionally, a weaker exchange rate could make exports more competitive, but only up to a certain point.
If the decline in the exchange rate is too steep, it could erode the profitability of exporting companies and hinder their ability to compete in international markets.
Investment is another sector that could be negatively affected by a significant drop in the exchange rate. Foreign investors may become hesitant to invest in the country if they anticipate further depreciation in the currency.
This could lead to a decrease in foreign direct investment (FDI) inflows, which are crucial for economic growth and development.
Furthermore, domestic investors may also become cautious and opt to hold their investments in foreign currencies or seek alternative investment opportunities abroad, which could further exacerbate the decline in the exchange rate.
Inflation is yet another area that could be impacted by a significant depreciation of the ruble. A weaker currency could lead to higher import prices, which would translate into higher costs for imported goods and services.
This, in turn, could put upward pressure on consumer prices, leading to inflationary pressures. Higher inflation erodes the purchasing power of consumers and reduces their standard of living.
It also complicates the task of monetary policymakers, who must strike a delicate balance between stimulating economic growth and containing inflationary pressures.
Given the potential risks associated with a significant drop in the exchange rate, it is crucial for policymakers to take proactive measures to maintain stability in the economy.
These measures should aim to promote confidence in the currency and ensure that the exchange rate remains within a manageable range.
Central banks can intervene in the foreign exchange market by buying or selling currencies to influence the exchange rate.
Additionally, fiscal policies, such as maintaining a prudent fiscal stance and implementing structural reforms to enhance productivity and competitiveness, can also contribute to stabilizing the exchange rate.
In conclusion, while the current exchange rate between the ruble and the dollar is weaker compared to last year’s levels, it does not pose an immediate crisis.
However, the decline in the exchange rate raises concerns and warrants close monitoring, as it could have adverse effects on various sectors of the economy.
Policymakers must implement measures that promote confidence in the currency and ensure that the exchange rate remains within a manageable range.
By adopting a proactive approach and implementing appropriate policies, the authorities can mitigate potential risks and maintain a stable economic environment.
According to Robin Brooks, chief economist with the Institute of International Finance, Russia’s economy is facing a “slow burn” in the long term due to the pressure from sanctions and Putin’s war spending.
The dilemma lies in the fact that Putin needs to spend a significant amount of money on the war, which is highly expensive.
However, this creates a challenge in terms of managing cash flow and increasing interest rates to prevent the situation from spiraling out of control.
Brooks believes that there is no ideal solution to this problem. In addition to these challenges, Russian oil is also facing Western bans and a price cap imposed by the Group of Seven democracies.
If the G7 were to lower the price cap from $60 to $50, it would further reduce Russia’s oil earnings and add more pressure on the ruble and the central bank.
Despite the decline in the ruble, Chris Weafer, CEO and Russian economy analyst at consulting firm Macro Advisory Partners, believes that it does not indicate an imminent major financial crisis for Russia.
The Kremlin can influence the exchange rate by instructing state-controlled exporters when to sell foreign currency for rubles, as there is no foreign investment in the currency.
Furthermore, the recent rise in prices for Russian oil has reduced the discounts given to customers in India and China.
However, Janis Kluge, a Russian economy expert at the German Institute for International and Security Affairs in Berlin, argues that hiking interest rates to boost the ruble comes at the expense of the private economy.
This prioritization of the war and defense industries over the welfare of households will ultimately erode economic growth and put more long-term stress on the ruble, Kluge claims.
Without foreign investment, Russia will become more dependent on imports and its citizens will not be able to maintain the same level of lifestyle as in previous years.