On Monday, the economic adviser to Russian President Vladimir Putin criticized the Bank of Russia's loose monetary policy, which has led to a 30% fall in the ruble against the dollar since the beginning of the year, indicating that the discord between Russia's monetary authorities and the government is intensifying.
Since Putin's deployment of troops to Ukraine in February 2022, the ruble has fallen by about a quarter against the dollar. Amid the ruble's plunge, Putin's economic adviser Maxim Oreshkin said the Kremlin wants the ruble to strengthen and expects monetary normalization to be achieved soon. A stronger ruble aligns with Russia's economic interests, and the Bank of Russia has all the tools necessary for monetary policy normalization and to bring loan interest rates to sustainable levels.
In July of this year, the Bank of Russia raised its interest rate by 100 basis points to 8.5% and hinted that the devaluation of the ruble was caused by a shrinkage in Russia's current account surplus. Data shows that from January to July this year, Russia's current account surplus decreased by 85% compared to the same period.
On Monday, the Bank of Russia stated that the weakening of the ruble would not pose a risk to financial stability and once again sent a strong signal that interest rates might be raised soon.
Since the conflict between Russia and Ukraine, the ruble has been on a declining trend against the dollar, hitting a record low of 120 rubles to the dollar in March last year. Despite recovering to near a 7-year high supported by capital controls and surging export revenues, Timothy Ash, a senior sovereign strategist at BlueBay Asset Management in London, predicts that the ruble will continue to face significant depreciation pressure due to factors such as a decline in energy revenues caused by the Russia-Ukraine conflict, G7 group oil price caps, significant increases in import costs, and continuous capital flight.
To stem the ruble's decline, the Russian government might implement stricter capital controls. Meanwhile, the central bank might further increase interest rate levels. Higher interest rates are likely to noticeably suppress economic growth, which in turn could add more pressure to the depreciation of the ruble. Against the backdrop of the conflict between Russia and Ukraine and an increasingly pessimistic global economic outlook, the "pessimistic spiral" between the ruble, inflation, and economic growth is unlikely to change in the short term.
Last week, the Bank of Russia halted the finance ministry's foreign currency purchases in an attempt to reduce volatility in the foreign exchange market. However, analysts generally believe that the scale and impact of this measure are limited, making it difficult to effectively support the ruble's exchange rate.
