The Russian economy is in the midst of a deepening crisis as its currency, the ruble, continues to fall to record lows, prompting the country’s central bank to take a series of emergency measures.
As inflation rates remain stubbornly high and sanctions are imposed deeper on the economy, Russia faces increasing challenges in stabilizing its financial markets and curbing runaway consumer prices.
The Bank of Russia announced last week that it would suspend all foreign currency purchases for the rest of the year and began selling the Chinese yuan to support the beleaguered ruble. The intervention came as the ruble fell below 114 to the dollar, a level not seen since the first days of Russia’s invasion of Ukraine in February 2022.
“This decision aims to reduce volatility in financial markets,” the central bank said in a statement, acknowledging growing concerns that a currency collapse could exacerbate inflation and erode living standards.
However, this measure may only provide temporary relief and analysts warn that these steps are unlikely to lead to a significant recovery in the ruble, given the ongoing structural weakness in the Russian economy and the impact of sweeping Western sanctions.
Standard interest rates and penalties
Official figures show that Russia’s inflation rate peaked at more than 9% in August and remains high, but experts warn that the real numbers may be much higher, explaining that the official data underestimates the extent of the rise in prices and the prices of basic goods such as potatoes have doubled since late 2017. 2023, while other basic goods such as butter are now so expensive that stores have resorted to locking them to prevent theft.
Central Bank Governor Elvira Nabiullina described the situation as unprecedented, noting that the unemployment rate in Russia has reached its lowest level ever at 2.4%, and that production facilities are operating at full capacity but the tight labor market has pushed wages to rise, and thus consumer prices.
“Almost everything has become more expensive: raw materials, components, logistics, equipment, labor,” Nabiullina told lawmakers.
In response to rising inflation, the Bank of Russia raised its key interest rate to 21% in October – the highest level since 2003. Despite this, the measures have not succeeded in alleviating inflationary pressures and calls are growing among financial experts, such as those at the Bank of Russia, to consider… In steeper interest rate increases, perhaps as high as 30% or more.
Business leaders have criticized the current policy, arguing that such high borrowing costs are already stifling businesses without effectively tackling inflation.
“This is a situation that is probably unprecedented in modern world history, when the central bank rate is 2.5 times higher than inflation and still is not slowing,” they said.
Western sanctions remain a major driver of economic instability in Russia and the latest US measures target an additional 50 Russian banks, including Gazprom Bank, a major player in facilitating natural gas exports to Europe.
These sanctions reduced Russia’s access to the US dollar, complicating international trade and exacerbating foreign currency shortages.
The effects of sanctions ripple through the economy, preventing foreign investment, limiting access to vital imports, and Russian exporters are experiencing payment disruptions, discouraging them from repatriating their foreign currency earnings – a dynamic that weakens the ruble further.
The economic crisis comes amid escalating tensions on the geopolitical front, and the recent Russian test of the Oreshnik missile, an experimental missile capable of carrying multiple nuclear warheads, has raised fears of another escalation in the conflict in Ukraine.
Meanwhile, the incoming Trump administration in the United States has signaled a potentially more aggressive stance on the war, with newly appointed envoy Keith Kellogg supporting Ukraine’s use of long-range missiles against Russian targets.
