The Russian rouble has fallen to its weakest level in 10 months, losing about 20 per cent of its value since the start of December, as western sanctions, Moscow’s waning energy revenues and high military spending exert pressure on the currency.
With capital controls in place and foreign trading in the currency largely moribund, analysts said the value of the currency no longer reflected a forward-looking assessment of the state of the economy but more of a short-term snapshot.
“Trade flows have become the main factor behind the rouble moves,” said Natalia Lavrova, chief economist at BCS Global Markets.
The currency is trading at about Rbs75 to the dollar, from the peak of Rbs50 it reached at the end of July and about the level it was at before the full-scale invasion of Ukraine a year ago. After the war started it collapsed to about Rbs140 to the dollar, according to Bloomberg data, following the imposition of sanctions, and then recovered after interest rates were raised to 20 per cent and capital controls imposed.
The currency’s decline this year is being driven by lower energy revenues, a result of western sanctions on Russian oil exports including a $60-a-barrel price cap imposed by the EU in December. Moscow is now selling much of its oil to China and India, which can demand a discount on the price, particularly since February 5 when G7 sanctions were extended from Russian crude to oil products.
The spread between Brent crude and Russian Urals was $29.24 on Tuesday, compared to $18.55 at the start of November. Revenues in January fell 46 per cent year on year, the finance ministry said.
The rouble’s fall is being tempered by the central bank selling renminbi holdings from its national wealth fund, in accordance with its “budget rule”: when energy revenues are lower than expected, the bank sells assets from the fund to cover the difference.
In January, according to the finance ministry, Russia sold Rbs54.5bn of renminbi and plans to triple this amount in February. If it did, this would account for less than 6 per cent of the fund’s total renminbi holdings, suggesting that the strategy can be maintained for some time.
“These sales are not aimed to strengthen the rouble, as they cannot outweigh the trade flows, although may have a minor supporting effect,” said Vladimir Osakovsky, the chief Russia economist at the Bank of America.
A weaker rouble gives Russia higher export revenues as it receives energy income mostly in dollars and euros, while government spending is largely in the local currency.
“When the exchange rate goes one rouble down, the budget receives an extra Rbs120bn,” Lavrova said.
The recent decline is not necessarily bad news for Moscow: last year the government worried that the currency had strengthened too much. Economy minister Maxim Reshetnikov said after it hit Rbs50 to the dollar that “the profitability of many industrial enterprises became negative at the current exchange rate”.
Too weak a currency, however, poses risks for inflation — through more expensive imports — and financial stability as it triggers demands for liquidity, analysts at the Kyiv School of Economics Institute analysts said in a report this month.
Government statistics demonstrate the pressure on the currency. In January, the current account surplus, the difference in net value between exports and imports, fell to $8bn. This was a year-on-year drop of almost 60 per cent.
Falling oil and gas revenues also put pressure on government finances. But instead of tightening its belt, the state increased spending in January by 59 per cent year on year. By the end of February, Russia had spent 17 per cent of the 2023 budget but received only 5.3 per cent of its expected annual revenue, according to finance ministry data.
“The scale of spending increase in January is quite unusual as the government usually trims spending at the start of the year,” Osakovsky said. He argued that the spending surge could be another reason behind the rouble’s decline, as “part of the rouble inflows could have been used to buy dollars to pay for imports”.
It is unclear how low the rouble will fall. A recent central bank survey of Russian analysts forecast that the currency would trade in the Rbs67-Rbs77 range this year, a level that first deputy prime minister Andrei Belousov last year had described as “the most comfortable for Russian industry”.
Analysts believe that the currency’s future direction will be determined by the same factors that are driving it now — the shifting pattern of imports and exports, particularly in the energy sector.
Sofya Donets, chief Russia economist at Renaissance Capital, said: “The rouble exists in a relatively sterile environment and reflects one fundamental aspect of the Russian economy — the trade balance.”