Russia’s ruble has plunged amid fresh sanctions as wartime economy strains

Russia’s ruble has fallen to its lowest level against the U.S. dollar since the beginning of its full-scale invasion of Ukraine, a potential result of new U.S. sanctions and the latest sign of a struggling wartime economy.

Russia’s central bank said on Wednesday it would stop foreign currency purchases for the rest of the year after the ruble weakened beyond 110 rubles to the U.S. dollar, down by one-third since early August.

“The decision was made to reduce the volatility of financial markets,” the regulator said in a statement.

The ruble’s slide comes days after the U.S. on Thursday sanctioned Russia’s third largest bank, Gazprombank, and its six foreign subsidiaries, which have handled most foreign payments for natural gas exports.

Earlier rounds of sanctions spared Russian gas because Europe’s economy was so dependent on it, but European countries have since lined up alternative supplies and are now far less reliant on Russian gas.

The U.S. treasury and state departments said last week the new sanctions “will make it harder for the Kremlin to evade (existing) U.S. sanctions and fund and equip its military.”

Canada and the United Kingdom have previously sanctioned Gazprombank.

Dmitry Pyanov, deputy CEO of Russia’s second largest lender VTB, told Reuters the U.S. sanctions on Gazprombank likely “have had a significant impact” on the ruble “as it has ceased to be a channel for delivering foreign currency to the Moscow Exchange.”

Russia’s finance minister, Anton Siluanov, told a financial conference in Moscow this week that a weak ruble was “very, very favourable” for exporters — suggesting the Kremlin may be content with letting the exchange rate slide.

Russia published new economic data on Wednesday highlighting the latest signs of overheating in an economy retooled for the purpose of fighting the war in Ukraine, which has sucked workers out of the labour force.

Real wages were up 8.4 per cent in September in year-on-year terms, unemployment hit a record low 2.3 per cent in October, and weekly inflation stands at almost 0.4 per cent.

Overall inflation has remained stubbornly around eight per cent — twice as high as the central bank’s target.

The bank last month raised its base interest rate to a record-high of 21 per cent in an effort to rein inflation in, but massive government spending on both the military and the struggling labour force has made it difficult.

“One of the things that’s actually driving inflation is that they’re paying people so much money to go to the war, to recruit them,” said Lisa Sundstrom, a political science professor at the University of British Columbia who studies Russia, to Global News.

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“Even in domestic industries, they’re having to pay people really high salaries because they have a labour shortage.”

The ruble’s fall could further fuel inflation, according to the central bank’s own estimates that predict a 10-per cent weakening of the currency adds 0.5 percentage points to inflation.

That implies the four-month fall could add 1.5 per cent to the current rate.

“For the central bank, it represents a challenge in combating rising prices,” economist Evgeny Kogan told Reuters.

Chris Weafer, CEO at Macro-Advisory Ltd. consultancy, told the Associated Press last month the latest interest rate hike was “not so much a cry for help, but a scream of pain” from regulators.

Independent Russian economists have said the economy is moving into a period of “stagflation” — a combination of high inflation and low growth.

More than one-third of next year’s budget has been allocated toward the military-industrial complex as Moscow continues to press ahead with its war in Ukraine.

Sundstrom said there could be an economic “crisis” if the war ends and that money is no longer flowing.

“It’s not like business is going to come back immediately, I would think,” she said, adding some oligarchs and business leaders who opted to stay in Russia since the invasion began have begun to complain about the current state of the economy.

“At the same time, if the war were to end, what are you going to do with all those soldiers who are being paid these enormous amounts of money?” she asked. “Do you just try to keep paying to them?”

—with files from Reuters and the Associated Press