To stave off blazing inflation, Russia’s central bank halted all foreign currency purchases for the rest of the year while actively selling Chinese yuan in the hope of supporting the ruble. The ruble, currently worth just a fraction of a penny, hit a low on Wednesday that has not been seen since the start of the Ukraine war.
The aim is to undercut the ruble and contain further price pressure that is entering the country due to the rising costs of imported goods. The Russian economy is also suffering from a lack of foreign investment caused by Western government sanctions that ban companies from trading with Russia. With most Russian financial institutions now cut off from trading dollars, the country lacks a steady supply of U.S. currency reserves.
“This decision is aimed at reducing volatility in financial markets,” the Bank of Russia continued Wednesday.
Official inflation rates peaked at over 9% year-on-year Augustand remain elevated. Russian political scientist Kirill Rogov believes these numbers likely underestimate the problem, which may be the case with actual rates significantly higherciting data from Raiffeisen Bank Analysts and market research companies ROMIR.
The central bank’s announcement came a week after the US government imposed new economic sanctions against Gazprombank. The bank was previously exempt because it plays a critical role in enabling the export of natural gas to a handful of American allies in Europe by processing cross-border payments.
On Wednesday, the ruble then fell below the rate of 114 per dollar, the lowest level since the beginning of March 2022. The Moscow daily newspaper Rossiyskaya Gazeta called It is a “panic attack for Russia’s foreign exchange market”.
Finance Minister Anton Siluanov argued that the slump would benefit exporters, whose goods would suddenly be much cheaper for foreigners to buy. The risk, however, is that a weak ruble ends up just importing inflation from abroad by driving up the prices of imported foreign goods.
Russia raises interest rates to the highest level in 20 years
On the orders of President Vladimir Putin, inflation in Russia began to rise Hundreds of thousands of working-age men to fight in Ukraine and mobilized Russian industry to support its military goals. Since fewer workers were available, wages in the civilian economy rose sharply. Rising labor prices were quickly passed on to consumers as supply struggled to meet domestic demand.
“Unemployment has never been as low as 2.4%,” Central Bank Governor Elvira Nabiullina told lawmakers in the Russian Duma earlier this month. “We are now in unprecedented territory with almost all production facilities running at full speed.”
Consumer prices are rising. The price of a staple food like potatoes almost doubled since last December. Butter is now so expensive that stores have locked up their supplies Prevent theft. Also mortgage loans rose after the government stopped providing generous subsidies for the purchase of an apartment or house in July.
“Inflation is stubbornly high for the fourth year in a row,” Nabiullina told lawmakers, adding: “Almost everything is becoming more expensive: raw materials, components, logistics, equipment, labor.”
Their institution’s response to this pressure was to raise the key interest rate by two full percentage points to 21% in October. a level that has not been reached since 2003.
Still, this wasn’t nearly enough to curb inflation or stop the ruble’s steady decline. This prompted the Russian business newspaper RBK advocate on Wednesday that key interest rates will rise to a staggering level of between 30% and 40% to support the currency – even if that brings with it the risk of a slowdown in growth.
High-interest drugs are more harmful than inflation disease
Not everyone agrees with this. The chairman of Severstal, Alexei Mordashov, a supplier of steel needed for the war effort, said the high interest rates on loans were already painful – and what was worse was that they had achieved comparatively little.
“This is a situation that is probably unprecedented in modern world history, when the central bank’s key interest rate is 2.5 times higher than inflation and inflation is still not abating,” Mordashov said quoted from Politically as it was said on Wednesday. “It’s as if the medicine is more harmful than the disease.”
Russia’s efforts to control consumer prices could give the new Trump administration greater leverage to force Moscow to the negotiating table.
His transition team on Wednesday appointed Keith Kellogg as special envoy for Ukraine and Russia. The retired general last week supported the Biden administration’s approval of Ukraine’s use of long-range ATACMS missiles on targets in Russia in response to North Korea’s troop deployment, saying the decision should have been made much earlier.
“We have fundamentally refrained from letting Zelensky fight a war that he should have fought a long time ago,” he said told fox News. “They should have done this a year ago.”
Russia responded to the recent escalation with the first launch of an experimental medium-range ballistic missile MIRV named “Oreshnik” capable of being armed with multiple nuclear warheads. It has raised fears that the conflict could escalate Third World War before Trump takes office in January.