After Russia’s ruble hit a 16-month low against the U.S. dollar, raising fears of rising inflation, even one of President Vladimir V. Putin’s top cheerleaders in state media lashed out at the country’s financial authorities on Thursday over an exchange rate that he said was a subject of global mockery.
The Russian central bank took measures on Thursday to stabilize the currency, amid the latest squall of financial volatility unleashed by Mr. Putin’s war against Ukraine. This time, the challenges are seen in both a struggling rubble that is fueling inflation, but also in government budget deficits that raise concerns about the sustainability of Russia’s intense spending on the war.
The weakening ruble neared an exchange rate of 100 per U.S. dollar earlier this week, down by roughly 25 percent since the start of the year. The decline prompted the Bank of Russia on Thursday to halt purchases of foreign currency for the remainder of the year “to reduce volatility.”
The central bank’s move should help shore up the currency, because when the bank spends rubles to buy dollars or euros, it increases the supply of rubles in circulation, lowering their value. The ruble gained slightly on Thursday.
But the events demonstrate how Russia’s dramatically changing economy is challenging Moscow’s financial policymakers, who have nimbly reacted to wartime shocks but still face longer-term dilemmas. Yawning deficits, coupled with exports that are increasingly crimped by sanctions, have disrupted Russia’s economic equilibrium.
The central bank has forecast inflation between 5 and 6.5 percent this year. Official data released on Wednesday showed the annual rate of inflation accelerating to 4.3 percent in July.
“The ruble exchange rate is only an indicator,” said Alexandra Prokopenko, a nonresident scholar at the Carnegie Russia Eurasia Center and a former Russian central bank official. “It is screaming that the economy is very badly balanced, that it’s not functioning properly — and do something, because later on it will be worse.”
How much the Bank of Russia’s move on Thursday will bolster the ruble is unclear.
“It helps, but it’s not a game changer,” said Janis Kluge, a researcher who focuses on the Russian economy at the German Institute for International and Security Affairs. “What is more important is what happens to commodity prices and how fiscal spending evolves over the next few months.”
Russia has been on an economic roller coaster since Mr. Putin launched his invasion of Ukraine in late February of last year.
An onslaught of Western sanctions and a dramatic exodus of capital and assets pushed the country into crisis in the initial aftermath of the invasion. The ruble plummeted from 76 per dollar a week before the invasion to as low as 135 the following month. The central bank took a series of dramatic measures, including strictly limiting the flow of money out of the country, to stave off a full-blown meltdown.
Then, the situation changed. A spike in oil prices, in part because of the conflict, helped raise Russian export revenue, just as imports fell on account of skittish Russian consumers, retreating foreign companies and other factors. The result was a record trade surplus of $221 billion in 2022, up 86 percent from the previous year. The ruble did a U-turn and soared to a seven-year high.
But this year, Russia’s trade surplus has shrunk significantly. Imports have recovered as Russian consumers return to buying and the government plows billions into the military-industrial complex to fund the war, with many goods still requiring imported materials.
Oil revenues have been crimped by an embargo and price cap, while crude prices have fallen since last year’s highs. Political uncertainty, including an aborted mutiny in June by the mercenary tycoon Yevgeny V. Prigozhin has prompted Russians to move money into foreign accounts.
As a result the ruble has been battered, losing nearly half its value since the highs of last year.
The central bank’s move Thursday marked the second time since the start of the war that Russia has been forced to abandon a policy of regularly buying and selling foreign currency to insulate the country’s energy-dependent economy against oil price fluctuations.
Vladimir Solovyov, a talk-show host on state television and a champion of the Kremlin, raged about the weakening ruble on his Thursday show, demanding the central bank explain “why the hell the rate is jumping like that, so that everyone abroad is laughing.”
He also addressed the country’s lawmakers. “Have you not noticed the exchange rate we have in the country? Have you sent even one request to the central bank? So these people come and explain to people what is going on?”
The most immediate concern for Russian financial policymakers is the possibility of significantly higher consumer prices. The country’s central bank reacted to that risk late last month with a higher-than-expected rise in interest rates, to 8.5 percent, and more increases could be on the way.
Mr. Solovyov warned on his show that the inflation rate could peak during Mr. Putin’s re-election campaign, ahead of a vote scheduled next March.
Russia will reports its latest gross domestic product figures on Friday. Officials have touted the country’s growth outlook, but analysts point out that much of the economic output is being driven by state spending on the war effort. That spending helps drive inflation, and reducing it could cause an economic slowdown.
“They are ballooning the economy with state demand,” Ms. Prokopenko said. “It’s a pure sugar injection for the economy, so once it stops, I would say it will be a great shock for the economy.”
The cheaper ruble in the short term will help the government finance its vast war expenditures, which last year caused the second-highest deficit since the breakup of the Soviet Union. Russian oil sold in foreign currency will now buy more rubles at home.
Some analysts, including Chris Weafer, chief executive of the Eurasia consultancy Macro-Advisory, say that Russian financial authorities are deliberately allowing the ruble to weaken.
“The weak ruble does reflect the government’s concern about the level of budget receipts — and they don’t have many areas where they can cut the budget without having an impact on the military or the social stability you now see in Russia,” Mr. Weafer said. “So the lesser of the two evils is to let the ruble weaken.”
But others don’t believe Russia is exercising that level of control.
“I don’t think the Russian finance ministry wants to weaken the ruble, despite the positive effect on revenues in the short term,” Mr. Kluge said. “Inflation also increases spending. For example, pensions will have to be increased accordingly, albeit with a delay.”