explainers

What’s behind the ruble’s steady depreciation, and is the Kremlin planning to intervene?

Source: Meduza

On October 18, Russia’s Central Bank set the official exchange rate at 97.1 rubles to the U.S. dollar. Back in early August, the rate was just above 86 rubles, but it soon started climbing — and it hasn’t stopped since. Meduza explores what’s driving the ruble’s decline, how soon the rate might surpass 100 rubles per dollar, and whether the Russian government has the means (or the will) to reverse the trend.

As strange as it may sound, no one really knows why the ruble is weakening again. When the price of “unfriendly currencies” started rising in August, analysts proposed nearly 10 different theories, ranging from investor jitters over Ukraine’s offensive in the Kursk region to counterparty banks rushing to comply with sanctions before they took effect. Despite no convincing explanation, the dollar still rose by five rubles by the end of August. Unable to pinpoint a clear cause, economists surveyed by RBC concluded that September would likely see less volatility, as there hadn’t been any major shifts in the key factors influencing the ruble’s exchange rate.

Adding to this optimism was the expectation that the Central Bank would raise the key interest rate at its upcoming meeting. As anticipated, the regulator raised the rate to 19 percent per annum, which, under normal circumstances, should strengthen the ruble. On top of that, oil prices rose with the onset of fall. Between September 10 and 21, oil prices increased by $10 per barrel, meaning exporters would earn more foreign currency and sell more of it domestically, helping to support the ruble.

This did seem to have a short-term impact. At the begining of September, the dollar was worth 90 rubles, and by the end of the month, it had increased by just three rubles. The Central Bank attributed this to “post-trade settlements in the Russian market adapting to the infrastructural restrictions introduced in June.” In simpler terms, the regulator meant that due to sanctions, Russian exporters were trading more in rubles, causing their foreign currency sales to drop by 30 percent. However, in order for foreign buyers to pay in rubles, they had to purchase them from local banks in Russia. As a result, banks acquired more foreign currency that they then sold on the domestic market, which the Central Bank believes helped “maintain the balance of foreign currency supply and demand.”

That said, the ruble-yuan exchange rate wasn’t quite as stable. While the U.S. dollar only rose by 1.7 percent against the ruble over the course of the month, the Chinese yuan surged nearly 10 percent. This spike appears to have been largely due to the yuan being undervalued in Russia during the summer. In August, the discrepancy between the yuan-dollar exchange rate in Russia and internationally reached 10 percent, but by September, this gap had narrowed to just one percent.

Overall, the Central Bank’s September report didn’t flag any negative trends. In fact, the bank noted that the yuan-dollar exchange rate had “normalized” and that the public had sold eight times more foreign currency than in August, suggesting that Russians didn’t expect the dollar to keep rising.

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Expectations for a calm October also seemed justified. First, oil prices remained above $80 per barrel. Second, the Finance Ministry adjusted its operations under the fiscal rule. While the state’s purchases of foreign currency in September were roughly offset by sales from the Central Bank, in October, the bank increased its foreign currency sales 26-fold. In real terms, that’s five billion rubles ($56.5 million) per day — less than five percent of daily trading volumes but still enough to provide some support to the ruble, according to economist Dmitry Polevoy. Experts also predicted that the Central Bank will raise the key interest rate again at its upcoming October 25 meeting.

But the forecast didn’t hold. Over two weeks, the dollar jumped from 93 to 97 rubles — levels not seen in a year. The yuan also hit a one-year high. Alexander Isakov, the head Russia specialist at Bloomberg Economics, attributed this to “adjustments in [Russian foreign trade], where longer settlement periods are leading to a kind of forced capital outflow.” An economist from Sinara Investment Bank suggested that high demand for foreign currency was driven by non-residents selling off assets and moving funds ahead of October 12, when sanctions against the Moscow Exchange took effect.

If that were the case, the ruble should have strengthened after that date, once the demand for foreign currency had dropped off. But it didn’t.

So will the ruble keep falling?

No one can predict with certainty whether the ruble will become stronger or weaker. For example, on a day when the ruble’s value rose slightly, analysts at Tsifra Broker wrote that there are “no obvious factors suggesting the ruble will continue to strengthen.” A week earlier, on a day when the ruble’s value sank slightly, economist Dmitry Polevoy noted that he didn’t see “any significant factors for a further significant and sustained weakening of the ruble without a deterioration in external market conditions,” although he did expect “increased volatility” through the end of the year.

On October 15, Bloomberg’s Alexander Isakov predicted that the dollar would rise by another three percent against the ruble by January, reaching 100 rubles. Two days later, he said that the dollar’s value would remain in double digits for the rest of the year.

The market is full of conflicting forecasts like these. The debate over whether the dollar will soon hit 100 rubles has been ongoing since September. It’s already come close several times in 2024: on October 9, the interbank market briefly saw the dollar reach triple digits. On Forex, quotes have also been higher than the official rate. However, it’s important to note that interbank trading is based on negotiated deals, meaning a buyer can offer a higher price if they urgently need the currency. As for Forex, it’s mostly an international market — one that Russian companies now have little access to — and therefore not representative of trends inside Russia.

When it comes to the official exchange rate set by the Central Bank, economists remain cautiously optimistic. A recent survey of analysts suggests the average exchange rate from October to December will hover around 94.2 rubles per dollar. Given that the dollar is currently above 97 rubles, this implies the ruble could strengthen. Then again, economists were saying the same thing in August and September.

Does the Kremlin care?

It’s still unclear whether the Russian authorities are planning to intervene. A debate around the issue kicked off on October 15, when Bloomberg reported that officials had supposedly resigned themselves to the dollar reaching 100 rubles. According to two unnamed sources, the thinking was that a weaker ruble could help mitigate the impact of Western sanctions: with higher ruble prices for oil, budget revenues would increase.

This theory, however, was met with skepticism, as many Russian economists pointed out that a weaker ruble harms the budget more than it helps. First, it drives inflation higher, forcing the government to adjust social payments to keep up with rising prices. Second, as prices rise, so do the costs of government projects. And third, inflation usually leads to hikes in the key interest rate, which raises the cost of government borrowing — not just for new loans, but also for existing debt tied to the rate. On the flip side, however, oil revenues get an immediate boost from a weaker ruble, while potential expenses are delayed.

The last time the dollar crossed the 100-ruble threshold was in October last year, and the authorities reacted swiftly: President Vladimir Putin signed a decree requiring the largest exporters to repatriate 80 percent of their foreign currency earnings, 90 percent of which they then had to sell within two weeks.

This approach worked, with the ruble strengthening by 10 percent in just six weeks. However, over time, these requirements were gradually eased. Now, amid another round of ruble weakening, they’ve been loosened even further. Economist Egor Susin explained that the decision was predictable, as a recent rule change reduced the share of foreign currency earnings exporters are required to repatriate to 40 percent, while still mandating that they sell 50 percent of total revenue. This created “an odd situation where exporters didn’t have to return their earnings but were still required to sell them.”

However, Susin noted that “the timing of this decision isn’t ideal.” Exporters are currently selling around $8 billion worth of foreign currency per month, but “to cover capital outflows, they need to sell $10-11 billion.” All else being equal, this will cause the ruble to weaken.

According to Oleg Kuzmin, an economist at Renaissance Capital, there’s currently only about a 30 percent chance that the dollar will hit 100 rubles by year’s end. Still, three-digit dollar forecasts have already started appearing in long-term government projections. Economist Vladimir Bragin from Alfa Capital said that “psychologically, 100 rubles per dollar no longer feels as alarming as it did a year ago.”

Many Russians might disagree. As the ruble’s decline accelerated, inflation expectations worsened again. The public now expects prices to rise by 13.4 percent over the next year — 3.5 times higher than the Central Bank’s forecast. Previously, rising interest rates had helped keep inflation expectations in check, but now they’ve seen their biggest jump this year. This could also be influenced by the release of the federal budget draft, which includes a nearly 12 percent hike in utility tariffs. The budget also outlines record-high spending, which is seen as a negative factor for the ruble’s exchange rate.