In an attempt to stave off severe inflation, the Russian Central Bank has suspended all foreign currency purchases for the remainder of the year, while actively selling the Chinese yuan, in the hope of supporting the ruble. The ruble – currently worth a fraction of a penny – hit lows on Wednesday not seen since the start of the Ukrainian war.
The goal is to set a floor for the ruble and clamp down on further price pressures seeping into the country through the rising cost of imported goods. The Russian economy also suffers from a lack of foreign investment due to sanctions imposed by Western governments that prevent companies from doing business with Russia. With most Russian financial institutions now banned from dealing in dollars, this deprives the country of a steady supply of US currency reserves.
The Bank of Russia said: “This decision aims to reduce volatility in financial markets.” Wednesday.
Official inflation rates have peaked on an annual basis above 9% per cent Augustand continues to remain high. Russian political scientist Kirill Rogov believes these numbers are likely an underestimate of the extent of the problem and actual rates may be as well Materially higherCiting data from Raiffeisen Bank Analysts And a market research company Romer.
The central bank’s announcement came one week after the US government’s announcement imposed New economic sanctions on Gazprombank The bank was previously exempt, because it plays a vital role in enabling the export of natural gas to a few American allies in Europe by processing cross-border payments.
Consequently, on Wednesday, the ruble fell below the price of 114 to the dollar, the lowest level since early March 2022. Rossiyskaya Gazeta Named It is a “panic attack on the Russian currency market.”
Finance Minister Anton Siluanov said the decline would benefit exporters, whose goods suddenly became much cheaper for foreigners to buy. But the danger is that a weak ruble will only import inflation from abroad by raising the prices of imported foreign goods.
Russia raises interest rates to levels not seen in 20 years
Inflation began to rise in Russia following President Vladimir Putin’s directives Hundreds of thousands of working-age men to fight in Ukraine and organize Russian industry to support its military goals. With fewer workers available, wages in the civilian economy rose sharply. High labor prices were quickly passed on to consumers as supply struggled to meet domestic demand.
Central Bank Governor Elvira Nabiullina told lawmakers in the Russian Duma: “Never before has unemployment fallen to the level of 2.4%.” Earlier this month. “We are now in unprecedented territory, with almost all production facilities operating at full capacity.”
Consumer prices rise. Prices of basic foodstuffs such as potatoes Almost doubled Since last December. Butter is now so expensive that stores have shut off supplies Prevent theft. Mortgage loans too rose After the government in July stopped providing generous subsidies for buying an apartment or house.
“Inflation has remained stubbornly high for the fourth year in a row,” Nabiullina told lawmakers, adding that “almost everything has become more expensive: raw materials, components, logistics, equipment and labour.”
Her institution’s response to these pressures was to raise the key interest rate by a full two percentage points to 21% in October. A level not seen since 2003.
However, this was not enough to calm inflation or halt the steady decline of the ruble. This prompted the Russian business daily RBK to defends On Wednesday, benchmark interest rates rose to a staggering 30%-40% in order to support the currency – even if it threatens to slow growth.
High rates are more harmful than inflation
Not everyone agrees. Alexei Mordashov, head of Severstal, a supplier of steel needed for the war effort, said high borrowing rates were already painful — and worse, he said they achieved relatively little.
“This is a situation perhaps unprecedented in modern world history, when the central bank interest rate is 2.5 times higher than inflation and still is not slowing down,” Mordashov said. Quoted by POLITICO As he said on Wednesday. “As if the medicine is more harmful than the disease.”
Russia’s fight to control consumer prices may provide the incoming Trump administration with greater leverage to force Moscow to the negotiating table.
On Wednesday, his transition team specific Keith Kellogg, Special Envoy for Ukraine and Russia. The retired general last week supported the Biden administration’s approval of Ukraine’s use of long-range ATACMS missiles on targets in Russia in response to North Korea’s deployment of troops, saying the decision should have come much earlier.
He added: “We have essentially backed away from allowing Zelensky to fight a war that he should have fought a long time ago.” He said Fox News. “They should have done it a year ago.”
Russia responded to the latest escalation by launching for the first time an experimental medium-range ballistic missile called “MIRV.”OreshnikCapable of being armed with multiple nuclear warheads. It raised fears that the conflict might escalate to… World War III Before Trump took office in January.