In the last week of November, the Russian currency saw its biggest fall since the spring of 2022. In just two days, the ruble dropped 10 percent against both the U.S. dollar and the Chinese yuan. That put the ruble down 20 percent since the start of September, and almost 25 percent from the summer highs. For now, the exchange rate has somewhat recovered and poses no major risk for the Russian economy. But it’s another structural limitation on economic growth—alongside shortages of labor resources and production capacity.
The trigger for the November plunge was U.S. sanctions on Russian lenders, including state-owned Gazprombank. Up until now, Gazprombank, through which payments for Russian gas were made, was the only major Russian state bank not to have been sanctioned by Washington. The U.S. move means there will be less foreign currency entering Russia as payment for gas exports (until a workaround is found). When the news filtered through, everyone rushed to buy foreign currency and, as Western sanctions have already hollowed out Russian currency markets, any sudden change leads to exchange rate fluctuations.
Unusually, even the Russian authorities have conceded the impact of the latest U.S. sanctions. “The new restrictions on Russian banks required adjustments,” the Russian central bank said in a report published after the ruble’s plunge.
However, there are also longer-term factors at work. In October, the government cut the repatriation requirement for exporters, allowing them to convert a quarter of their foreign currency earnings into rubles (instead of half). Predictably, this led to a fall in the supply of U.S. dollars and yuan. At the same time, demand rose, not least because state spending in the fourth quarter of 2024 jumped by 1.5 trillion rubles ($14.3 billion). Government spending fuels demand that cannot be fully met by domestic production—thus increasing the need for imports, which must be paid for in foreign currency.
Following the full-scale invasion of Ukraine and the suspension of the budget rule under which Russia sold foreign currency to make up for any shortfall in energy export revenues, the value of the ruble has mostly been determined by the ratio between imports and exports. That ratio is not currently in Russia’s favor. Since the second quarter of 2024, Russia’s trade surplus has shrunk. On the one hand, oil prices have been falling (a trend accelerated by the victory of Donald Trump in the U.S. election and expectations the president-elect will boost oil production and impose tariffs). On the other hand, imports have grown because of inflated demand driven by an overheated economy.
Following the loss of Western markets, Russia’s export revenues are primarily determined by the ability of India and China to buy Russian oil—and the price at which they do so. While the war continues, Russia is unlikely to have any other options for expanding its exports.
Furthermore, the sanctions pressure on Russia’s trading partners has led to rising operational costs for both Russian exporters and importers. This has both reduced profits for exporters and pushed up the cost of imports. As a result, the demand for foreign currency has risen, and supply has fallen.
Typically, a 10 percent fall in the value of the ruble accelerates inflation by up to 0.6 percentage points. Prices began accelerating in Russia in the summer of 2023, and they show no signs of slowing. Annual inflation is already 8.78 percent—and will rise even further before the end of the year, thanks to high household spending over the New Year holidays and increased demand for imports. Even Russia’s sky-high interest rates of 21 percent are doing little to dampen price growth.
At the same time, rising inflationary expectations among both the general public and businesses mean demand for foreign currency is increasing as people seek to preserve the value of their savings by exchanging their rubles.
Reorienting consumer demand to domestically manufactured goods is impossible. The head of Russia’s central bank, Elvira Nabiullina, has said that the economy is operating at its limits, which means that there is no scope to increase production. The result is that a weakening ruble will have an even bigger effect on prices than previously.
In theory, it would be possible for the central bank to conduct a market intervention in support of the ruble (even while it remains committed to a free-floating currency). However, there are virtually no good options. One would be for Russia to tap its rainy-day fund, the National Wealth Fund, but it held a mere $31 billion at the start of November (excluding gold and illiquid assets). Relatively speaking, that’s not very much.
A major rate hike by the central bank is also an option. But interest rates are already high, and the market is expecting another rise in December—which means the central bank would have to increase the rate by up to 8 percentage points in one go to be sure of having an effect. That would not only hit the nonmilitary economy, which is teetering on the edge of stagnation, but damage the all-important defense sector.
Instead, in response to the ruble’s nosedive, officials have made verbal interventions to quell panic, and the central bank has stopped buying foreign currency on the domestic market. If necessary, the Kremlin could make informal requests to exporters to sell foreign currency, as it did during the 2014 ruble crisis. This may already have happened—it’s impossible to say with certainty.
Unimaginative as they are, these steps have been enough to halt the ruble’s slide for now. But more downward lurches are likely to be just around the corner.
The fundamental reasons for the ruble’s weakness have not gone anywhere, and the dynamic of Russia’s trade flows means the currency is destined to falter and inflation to rise. As the Russian economy slows despite significant state spending, the dynamics of the ruble exchange rate suggest the country is heading for stagflation (a toxic combination of slow growth and rising prices). The root cause is the war and ensuing Western sanctions and militarization of Russia’s economy. The country’s financial authorities don’t have the power to solve this problem—and they’re even afraid to speak about it publicly.
