Russia’s Rising Inflation and Plunging Currency: Discord Between Kremlin and Central Bank

Russia is currently facing a significant increase in inflation and a sharp decline in its currency, which has brought attention to a growing disagreement between the Kremlin and the country’s central bank.

In an emergency meeting on Tuesday, the Central Bank of Russia (CBR) raised interest rates by 350 basis points to 12% in an effort to halt the rapid depreciation of the ruble. The ruble had reached a 17-month low of nearly 102 to the dollar on Monday.

This sudden decision came after Maxim Oreshkin, President Vladimir Putin’s economic advisor, wrote an op-ed suggesting that loose monetary policy was the cause of the inflation and currency troubles. Oreshkin argued that the central bank had the necessary tools to rectify the situation.

The central bank justified its decision by stating that it aimed to limit risks to price stability, as inflationary pressure was building up. Over the past three months, price growth has averaged 7.6% annually on a seasonally adjusted basis, with core inflation rising to 7.1% during the same period.

The central bank’s board stated that the steady growth in domestic demand, which surpasses the capacity to expand output, is amplifying inflationary pressure and affecting the ruble’s exchange rate dynamics through increased demand for imports.

Despite the central bank’s previous decision to halt foreign currency purchases on the domestic market until 2024, the ruble’s decline was not halted. Russia often sells foreign currency to offset declines in oil and gas export revenues and buys it when running a surplus.

Prior to the Kremlin’s intervention, the Bank of Russia attributed the inflation and currency weaknesses to the country’s shrinking balance of trade. From January to July, Russia’s current account surplus fell more than 85% year on year.

Anatoly Aksakov, chairman of the Duma Committee on Financial Markets, stated on Telegram that “the ruble exchange rate is under state control,” according to a Google translation.

After working together to restructure the Russian economy and minimize the impact of economic isolation and sanctions from Western powers, the Kremlin and the Bank of Russia now appear to have divergent views on the causes of the currency troubles.

Analysts believe that the government’s direct intervention in monetary policy reflects the challenges faced by the country’s economy. Agathe Demarais, global forecasting director at the Economist Intelligence Unit, stated that the central bank’s earlier assessment regarding the collapse of Russia’s current account surplus being the main factor behind high inflation was correct.

Demarais explained that Western sanctions have curbed Russia’s hydrocarbon export revenues and increased import costs, which is further reinforced by the weakening ruble. She argues that the Russian currency has entered a vicious cycle that will be difficult to escape.

Following Russia’s invasion of Ukraine and subsequent Western sanctions, the ruble initially plummeted to 130 to the dollar in February 2022. The central bank implemented capital controls to stabilize the currency, eventually bringing it back to a range of 50 to 60 to the dollar by the summer of 2022.

The central bank has since loosened these capital controls to support the economy as the impact of sanctions grew. This, along with a period of low interest rates, has further entrenched the negative cycle for the ruble.

Demarais believes that blaming the central bank has become an easy tactic for the Kremlin since there are limited options to improve the situation.

Reports suggest that Russian authorities are considering the reintroduction of capital controls, such as compulsory sales of foreign currency revenues for exporters, as the central bank’s rate hike only slowed down the ruble’s decline.

Back to Capital Controls?

Economist Stephanie Kennedy from Julius Baer agrees that the most likely scenario is for the CBR to strengthen capital controls and enforce the rule that exporters must exchange their earnings from US dollars into rubles.

Kennedy explains that currency collapses are often triggered by nervous international investors or capital flight. Sanctions and capital controls have isolated Russia from the international financial system, resulting in limited trading of the ruble, especially against the US dollar.

The decline in exports since G7 countries imposed a $60 price cap on Russian crude oil in December, combined with increased imports for the war effort, has contributed to the devaluation of the ruble.

Kennedy notes that although the current account surplus has declined significantly, it remains at a tolerable level and within its historical average. A weaker currency benefits Russia’s oil revenues but increases import costs.

In June, Russian Deputy Prime Minister Andrey Belousov stated that a ruble value of 80-90 to the dollar was ideal for the country’s budget, importers, and exporters.

While it is possible that the CBR may raise interest rates to address the decline, aggressive hikes like those seen at the start of the war are unlikely. Higher interest rates would primarily hurt consumers and local businesses, further undermining public support for the war.

Julius Baer expects capital controls to be reinforced and the rule on exporters to be introduced. However, they anticipate the ruble to be around 92 to the dollar in three months and 95 in 12 months.

Kennedy concludes that although this implies a spot appreciation with a significant carry, the ruble is not easily tradable, and uncertainty about its outlook remains high.

Russia is currently facing a significant increase in inflation and a sharp decline in its currency, which has brought attention to a growing disagreement between the Kremlin and the country’s central bank.

In an emergency meeting on Tuesday, the Central Bank of Russia (CBR) raised interest rates by 350 basis points to 12% in an effort to halt the rapid depreciation of the ruble. The ruble had reached a 17-month low of nearly 102 to the dollar on Monday.

This sudden decision came after Maxim Oreshkin, President Vladimir Putin’s economic advisor, wrote an op-ed suggesting that loose monetary policy was the cause of the inflation and currency troubles. Oreshkin argued that the central bank had the necessary tools to rectify the situation.

The central bank justified its decision by stating that it aimed to limit risks to price stability, as inflationary pressure was building up. Over the past three months, price growth has averaged 7.6% annually on a seasonally adjusted basis, with core inflation rising to 7.1% during the same period.

The central bank’s board stated that the steady growth in domestic demand, which surpasses the capacity to expand output, is amplifying inflationary pressure and affecting the ruble’s exchange rate dynamics through increased demand for imports.

Despite the central bank’s previous decision to halt foreign currency purchases on the domestic market until 2024, the ruble’s decline was not halted. Russia often sells foreign currency to offset declines in oil and gas export revenues and buys it when running a surplus.

Prior to the Kremlin’s intervention, the Bank of Russia attributed the inflation and currency weaknesses to the country’s shrinking balance of trade. From January to July, Russia’s current account surplus fell more than 85% year on year.

Anatoly Aksakov, chairman of the Duma Committee on Financial Markets, stated on Telegram that “the ruble exchange rate is under state control,” according to a Google translation.

After working together to restructure the Russian economy and minimize the impact of economic isolation and sanctions from Western powers, the Kremlin and the Bank of Russia now appear to have divergent views on the causes of the currency troubles.

Analysts believe that the government’s direct intervention in monetary policy reflects the challenges faced by the country’s economy. Agathe Demarais, global forecasting director at the Economist Intelligence Unit, stated that the central bank’s earlier assessment regarding the collapse of Russia’s current account surplus being the main factor behind high inflation was correct.

Demarais explained that Western sanctions have curbed Russia’s hydrocarbon export revenues and increased import costs, which is further reinforced by the weakening ruble. She argues that the Russian currency has entered a vicious cycle that will be difficult to escape.

Following Russia’s invasion of Ukraine and subsequent Western sanctions, the ruble initially plummeted to 130 to the dollar in February 2022. The central bank implemented capital controls to stabilize the currency, eventually bringing it back to a range of 50 to 60 to the dollar by the summer of 2022.

The central bank has since loosened these capital controls to support the economy as the impact of sanctions grew. This, along with a period of low interest rates, has further entrenched the negative cycle for the ruble.

Demarais believes that blaming the central bank has become an easy tactic for the Kremlin since there are limited options to improve the situation.

Reports suggest that Russian authorities are considering the reintroduction of capital controls, such as compulsory sales of foreign currency revenues for exporters, as the central bank’s rate hike only slowed down the ruble’s decline.

Back to Capital Controls?

Economist Stephanie Kennedy from Julius Baer agrees that the most likely scenario is for the CBR to strengthen capital controls and enforce the rule that exporters must exchange their earnings from US dollars into rubles.

Kennedy explains that currency collapses are often triggered by nervous international investors or capital flight. Sanctions and capital controls have isolated Russia from the international financial system, resulting in limited trading of the ruble, especially against the US dollar.

The decline in exports since G7 countries imposed a $60 price cap on Russian crude oil in December, combined with increased imports for the war effort, has contributed to the devaluation of the ruble.

Kennedy notes that although the current account surplus has declined significantly, it remains at a tolerable level and within its historical average. A weaker currency benefits Russia’s oil revenues but increases import costs.

In June, Russian Deputy Prime Minister Andrey Belousov stated that a ruble value of 80-90 to the dollar was ideal for the country’s budget, importers, and exporters.

While it is possible that the CBR may raise interest rates to address the decline, aggressive hikes like those seen at the start of the war are unlikely. Higher interest rates would primarily hurt consumers and local businesses, further undermining public support for the war.

Julius Baer expects capital controls to be reinforced and the rule on exporters to be introduced. However, they anticipate the ruble to be around 92 to the dollar in three months and 95 in 12 months.

Kennedy concludes that although this implies a spot appreciation with a significant carry, the ruble is not easily tradable, and uncertainty about its outlook remains high.

Russia is currently facing a significant increase in inflation and a sharp decline in its currency, which has brought attention to a growing disagreement between the Kremlin and the country’s central bank.

In an emergency meeting on Tuesday, the Central Bank of Russia (CBR) raised interest rates by 350 basis points to 12% in an effort to halt the rapid depreciation of the ruble. The ruble had reached a 17-month low of nearly 102 to the dollar on Monday.

This sudden decision came after Maxim Oreshkin, President Vladimir Putin’s economic advisor, wrote an op-ed suggesting that loose monetary policy was the cause of the inflation and currency troubles. Oreshkin argued that the central bank had the necessary tools to rectify the situation.

The central bank justified its decision by stating that it aimed to limit risks to price stability, as inflationary pressure was building up. Over the past three months, price growth has averaged 7.6% annually on a seasonally adjusted basis, with core inflation rising to 7.1% during the same period.

The central bank’s board stated that the steady growth in domestic demand, which surpasses the capacity to expand output, is amplifying inflationary pressure and affecting the ruble’s exchange rate dynamics through increased demand for imports.

Despite the central bank’s previous decision to halt foreign currency purchases on the domestic market until 2024, the ruble’s decline was not halted. Russia often sells foreign currency to offset declines in oil and gas export revenues and buys it when running a surplus.

Prior to the Kremlin’s intervention, the Bank of Russia attributed the inflation and currency weaknesses to the country’s shrinking balance of trade. From January to July, Russia’s current account surplus fell more than 85% year on year.

Anatoly Aksakov, chairman of the Duma Committee on Financial Markets, stated on Telegram that “the ruble exchange rate is under state control,” according to a Google translation.

After working together to restructure the Russian economy and minimize the impact of economic isolation and sanctions from Western powers, the Kremlin and the Bank of Russia now appear to have divergent views on the causes of the currency troubles.

Analysts believe that the government’s direct intervention in monetary policy reflects the challenges faced by the country’s economy. Agathe Demarais, global forecasting director at the Economist Intelligence Unit, stated that the central bank’s earlier assessment regarding the collapse of Russia’s current account surplus being the main factor behind high inflation was correct.

Demarais explained that Western sanctions have curbed Russia’s hydrocarbon export revenues and increased import costs, which is further reinforced by the weakening ruble. She argues that the Russian currency has entered a vicious cycle that will be difficult to escape.

Following Russia’s invasion of Ukraine and subsequent Western sanctions, the ruble initially plummeted to 130 to the dollar in February 2022. The central bank implemented capital controls to stabilize the currency, eventually bringing it back to a range of 50 to 60 to the dollar by the summer of 2022.

The central bank has since loosened these capital controls to support the economy as the impact of sanctions grew. This, along with a period of low interest rates, has further entrenched the negative cycle for the ruble.

Demarais believes that blaming the central bank has become an easy tactic for the Kremlin since there are limited options to improve the situation.

Reports suggest that Russian authorities are considering the reintroduction of capital controls, such as compulsory sales of foreign currency revenues for exporters, as the central bank’s rate hike only slowed down the ruble’s decline.

Back to Capital Controls?

Economist Stephanie Kennedy from Julius Baer agrees that the most likely scenario is for the CBR to strengthen capital controls and enforce the rule that exporters must exchange their earnings from US dollars into rubles.

Kennedy explains that currency collapses are often triggered by nervous international investors or capital flight. Sanctions and capital controls have isolated Russia from the international financial system, resulting in limited trading of the ruble, especially against the US dollar.

The decline in exports since G7 countries imposed a $60 price cap on Russian crude oil in December, combined with increased imports for the war effort, has contributed to the devaluation of the ruble.

Kennedy notes that although the current account surplus has declined significantly, it remains at a tolerable level and within its historical average. A weaker currency benefits Russia’s oil revenues but increases import costs.

In June, Russian Deputy Prime Minister Andrey Belousov stated that a ruble value of 80-90 to the dollar was ideal for the country’s budget, importers, and exporters.

While it is possible that the CBR may raise interest rates to address the decline, aggressive hikes like those seen at the start of the war are unlikely. Higher interest rates would primarily hurt consumers and local businesses, further undermining public support for the war.

Julius Baer expects capital controls to be reinforced and the rule on exporters to be introduced. However, they anticipate the ruble to be around 92 to the dollar in three months and 95 in 12 months.

Kennedy concludes that although this implies a spot appreciation with a significant carry, the ruble is not easily tradable, and uncertainty about its outlook remains high.

Russia is currently facing a significant increase in inflation and a sharp decline in its currency, which has brought attention to a growing disagreement between the Kremlin and the country’s central bank.

In an emergency meeting on Tuesday, the Central Bank of Russia (CBR) raised interest rates by 350 basis points to 12% in an effort to halt the rapid depreciation of the ruble. The ruble had reached a 17-month low of nearly 102 to the dollar on Monday.

This sudden decision came after Maxim Oreshkin, President Vladimir Putin’s economic advisor, wrote an op-ed suggesting that loose monetary policy was the cause of the inflation and currency troubles. Oreshkin argued that the central bank had the necessary tools to rectify the situation.

The central bank justified its decision by stating that it aimed to limit risks to price stability, as inflationary pressure was building up. Over the past three months, price growth has averaged 7.6% annually on a seasonally adjusted basis, with core inflation rising to 7.1% during the same period.

The central bank’s board stated that the steady growth in domestic demand, which surpasses the capacity to expand output, is amplifying inflationary pressure and affecting the ruble’s exchange rate dynamics through increased demand for imports.

Despite the central bank’s previous decision to halt foreign currency purchases on the domestic market until 2024, the ruble’s decline was not halted. Russia often sells foreign currency to offset declines in oil and gas export revenues and buys it when running a surplus.

Prior to the Kremlin’s intervention, the Bank of Russia attributed the inflation and currency weaknesses to the country’s shrinking balance of trade. From January to July, Russia’s current account surplus fell more than 85% year on year.

Anatoly Aksakov, chairman of the Duma Committee on Financial Markets, stated on Telegram that “the ruble exchange rate is under state control,” according to a Google translation.

After working together to restructure the Russian economy and minimize the impact of economic isolation and sanctions from Western powers, the Kremlin and the Bank of Russia now appear to have divergent views on the causes of the currency troubles.

Analysts believe that the government’s direct intervention in monetary policy reflects the challenges faced by the country’s economy. Agathe Demarais, global forecasting director at the Economist Intelligence Unit, stated that the central bank’s earlier assessment regarding the collapse of Russia’s current account surplus being the main factor behind high inflation was correct.

Demarais explained that Western sanctions have curbed Russia’s hydrocarbon export revenues and increased import costs, which is further reinforced by the weakening ruble. She argues that the Russian currency has entered a vicious cycle that will be difficult to escape.

Following Russia’s invasion of Ukraine and subsequent Western sanctions, the ruble initially plummeted to 130 to the dollar in February 2022. The central bank implemented capital controls to stabilize the currency, eventually bringing it back to a range of 50 to 60 to the dollar by the summer of 2022.

The central bank has since loosened these capital controls to support the economy as the impact of sanctions grew. This, along with a period of low interest rates, has further entrenched the negative cycle for the ruble.

Demarais believes that blaming the central bank has become an easy tactic for the Kremlin since there are limited options to improve the situation.

Reports suggest that Russian authorities are considering the reintroduction of capital controls, such as compulsory sales of foreign currency revenues for exporters, as the central bank’s rate hike only slowed down the ruble’s decline.

Back to Capital Controls?

Economist Stephanie Kennedy from Julius Baer agrees that the most likely scenario is for the CBR to strengthen capital controls and enforce the rule that exporters must exchange their earnings from US dollars into rubles.

Kennedy explains that currency collapses are often triggered by nervous international investors or capital flight. Sanctions and capital controls have isolated Russia from the international financial system, resulting in limited trading of the ruble, especially against the US dollar.

The decline in exports since G7 countries imposed a $60 price cap on Russian crude oil in December, combined with increased imports for the war effort, has contributed to the devaluation of the ruble.

Kennedy notes that although the current account surplus has declined significantly, it remains at a tolerable level and within its historical average. A weaker currency benefits Russia’s oil revenues but increases import costs.

In June, Russian Deputy Prime Minister Andrey Belousov stated that a ruble value of 80-90 to the dollar was ideal for the country’s budget, importers, and exporters.

While it is possible that the CBR may raise interest rates to address the decline, aggressive hikes like those seen at the start of the war are unlikely. Higher interest rates would primarily hurt consumers and local businesses, further undermining public support for the war.

Julius Baer expects capital controls to be reinforced and the rule on exporters to be introduced. However, they anticipate the ruble to be around 92 to the dollar in three months and 95 in 12 months.

Kennedy concludes that although this implies a spot appreciation with a significant carry, the ruble is not easily tradable, and uncertainty about its outlook remains high.

Russia is currently facing a significant increase in inflation and a sharp decline in its currency, which has brought attention to a growing disagreement between the Kremlin and the country’s central bank.

In an emergency meeting on Tuesday, the Central Bank of Russia (CBR) raised interest rates by 350 basis points to 12% in an effort to halt the rapid depreciation of the ruble. The ruble had reached a 17-month low of nearly 102 to the dollar on Monday.

This sudden decision came after Maxim Oreshkin, President Vladimir Putin’s economic advisor, wrote an op-ed suggesting that loose monetary policy was the cause of the inflation and currency troubles. Oreshkin argued that the central bank had the necessary tools to rectify the situation.

The central bank justified its decision by stating that it aimed to limit risks to price stability, as inflationary pressure was building up. Over the past three months, price growth has averaged 7.6% annually on a seasonally adjusted basis, with core inflation rising to 7.1% during the same period.

The central bank’s board stated that the steady growth in domestic demand, which surpasses the capacity to expand output, is amplifying inflationary pressure and affecting the ruble’s exchange rate dynamics through increased demand for imports.

Despite the central bank’s previous decision to halt foreign currency purchases on the domestic market until 2024, the ruble’s decline was not halted. Russia often sells foreign currency to offset declines in oil and gas export revenues and buys it when running a surplus.

Prior to the Kremlin’s intervention, the Bank of Russia attributed the inflation and currency weaknesses to the country’s shrinking balance of trade. From January to July, Russia’s current account surplus fell more than 85% year on year.

Anatoly Aksakov, chairman of the Duma Committee on Financial Markets, stated on Telegram that “the ruble exchange rate is under state control,” according to a Google translation.

After working together to restructure the Russian economy and minimize the impact of economic isolation and sanctions from Western powers, the Kremlin and the Bank of Russia now appear to have divergent views on the causes of the currency troubles.

Analysts believe that the government’s direct intervention in monetary policy reflects the challenges faced by the country’s economy. Agathe Demarais, global forecasting director at the Economist Intelligence Unit, stated that the central bank’s earlier assessment regarding the collapse of Russia’s current account surplus being the main factor behind high inflation was correct.

Demarais explained that Western sanctions have curbed Russia’s hydrocarbon export revenues and increased import costs, which is further reinforced by the weakening ruble. She argues that the Russian currency has entered a vicious cycle that will be difficult to escape.

Following Russia’s invasion of Ukraine and subsequent Western sanctions, the ruble initially plummeted to 130 to the dollar in February 2022. The central bank implemented capital controls to stabilize the currency, eventually bringing it back to a range of 50 to 60 to the dollar by the summer of 2022.

The central bank has since loosened these capital controls to support the economy as the impact of sanctions grew. This, along with a period of low interest rates, has further entrenched the negative cycle for the ruble.

Demarais believes that blaming the central bank has become an easy tactic for the Kremlin since there are limited options to improve the situation.

Reports suggest that Russian authorities are considering the reintroduction of capital controls, such as compulsory sales of foreign currency revenues for exporters, as the central bank’s rate hike only slowed down the ruble’s decline.

Back to Capital Controls?

Economist Stephanie Kennedy from Julius Baer agrees that the most likely scenario is for the CBR to strengthen capital controls and enforce the rule that exporters must exchange their earnings from US dollars into rubles.

Kennedy explains that currency collapses are often triggered by nervous international investors or capital flight. Sanctions and capital controls have isolated Russia from the international financial system, resulting in limited trading of the ruble, especially against the US dollar.

The decline in exports since G7 countries imposed a $60 price cap on Russian crude oil in December, combined with increased imports for the war effort, has contributed to the devaluation of the ruble.

Kennedy notes that although the current account surplus has declined significantly, it remains at a tolerable level and within its historical average. A weaker currency benefits Russia’s oil revenues but increases import costs.

In June, Russian Deputy Prime Minister Andrey Belousov stated that a ruble value of 80-90 to the dollar was ideal for the country’s budget, importers, and exporters.

While it is possible that the CBR may raise interest rates to address the decline, aggressive hikes like those seen at the start of the war are unlikely. Higher interest rates would primarily hurt consumers and local businesses, further undermining public support for the war.

Julius Baer expects capital controls to be reinforced and the rule on exporters to be introduced. However, they anticipate the ruble to be around 92 to the dollar in three months and 95 in 12 months.

Kennedy concludes that although this implies a spot appreciation with a significant carry, the ruble is not easily tradable, and uncertainty about its outlook remains high.

Russia is currently facing a significant increase in inflation and a sharp decline in its currency, which has brought attention to a growing disagreement between the Kremlin and the country’s central bank.

In an emergency meeting on Tuesday, the Central Bank of Russia (CBR) raised interest rates by 350 basis points to 12% in an effort to halt the rapid depreciation of the ruble. The ruble had reached a 17-month low of nearly 102 to the dollar on Monday.

This sudden decision came after Maxim Oreshkin, President Vladimir Putin’s economic advisor, wrote an op-ed suggesting that loose monetary policy was the cause of the inflation and currency troubles. Oreshkin argued that the central bank had the necessary tools to rectify the situation.

The central bank justified its decision by stating that it aimed to limit risks to price stability, as inflationary pressure was building up. Over the past three months, price growth has averaged 7.6% annually on a seasonally adjusted basis, with core inflation rising to 7.1% during the same period.

The central bank’s board stated that the steady growth in domestic demand, which surpasses the capacity to expand output, is amplifying inflationary pressure and affecting the ruble’s exchange rate dynamics through increased demand for imports.

Despite the central bank’s previous decision to halt foreign currency purchases on the domestic market until 2024, the ruble’s decline was not halted. Russia often sells foreign currency to offset declines in oil and gas export revenues and buys it when running a surplus.

Prior to the Kremlin’s intervention, the Bank of Russia attributed the inflation and currency weaknesses to the country’s shrinking balance of trade. From January to July, Russia’s current account surplus fell more than 85% year on year.

Anatoly Aksakov, chairman of the Duma Committee on Financial Markets, stated on Telegram that “the ruble exchange rate is under state control,” according to a Google translation.

After working together to restructure the Russian economy and minimize the impact of economic isolation and sanctions from Western powers, the Kremlin and the Bank of Russia now appear to have divergent views on the causes of the currency troubles.

Analysts believe that the government’s direct intervention in monetary policy reflects the challenges faced by the country’s economy. Agathe Demarais, global forecasting director at the Economist Intelligence Unit, stated that the central bank’s earlier assessment regarding the collapse of Russia’s current account surplus being the main factor behind high inflation was correct.

Demarais explained that Western sanctions have curbed Russia’s hydrocarbon export revenues and increased import costs, which is further reinforced by the weakening ruble. She argues that the Russian currency has entered a vicious cycle that will be difficult to escape.

Following Russia’s invasion of Ukraine and subsequent Western sanctions, the ruble initially plummeted to 130 to the dollar in February 2022. The central bank implemented capital controls to stabilize the currency, eventually bringing it back to a range of 50 to 60 to the dollar by the summer of 2022.

The central bank has since loosened these capital controls to support the economy as the impact of sanctions grew. This, along with a period of low interest rates, has further entrenched the negative cycle for the ruble.

Demarais believes that blaming the central bank has become an easy tactic for the Kremlin since there are limited options to improve the situation.

Reports suggest that Russian authorities are considering the reintroduction of capital controls, such as compulsory sales of foreign currency revenues for exporters, as the central bank’s rate hike only slowed down the ruble’s decline.

Back to Capital Controls?

Economist Stephanie Kennedy from Julius Baer agrees that the most likely scenario is for the CBR to strengthen capital controls and enforce the rule that exporters must exchange their earnings from US dollars into rubles.

Kennedy explains that currency collapses are often triggered by nervous international investors or capital flight. Sanctions and capital controls have isolated Russia from the international financial system, resulting in limited trading of the ruble, especially against the US dollar.

The decline in exports since G7 countries imposed a $60 price cap on Russian crude oil in December, combined with increased imports for the war effort, has contributed to the devaluation of the ruble.

Kennedy notes that although the current account surplus has declined significantly, it remains at a tolerable level and within its historical average. A weaker currency benefits Russia’s oil revenues but increases import costs.

In June, Russian Deputy Prime Minister Andrey Belousov stated that a ruble value of 80-90 to the dollar was ideal for the country’s budget, importers, and exporters.

While it is possible that the CBR may raise interest rates to address the decline, aggressive hikes like those seen at the start of the war are unlikely. Higher interest rates would primarily hurt consumers and local businesses, further undermining public support for the war.

Julius Baer expects capital controls to be reinforced and the rule on exporters to be introduced. However, they anticipate the ruble to be around 92 to the dollar in three months and 95 in 12 months.

Kennedy concludes that although this implies a spot appreciation with a significant carry, the ruble is not easily tradable, and uncertainty about its outlook remains high.

Russia is currently facing a significant increase in inflation and a sharp decline in its currency, which has brought attention to a growing disagreement between the Kremlin and the country’s central bank.

In an emergency meeting on Tuesday, the Central Bank of Russia (CBR) raised interest rates by 350 basis points to 12% in an effort to halt the rapid depreciation of the ruble. The ruble had reached a 17-month low of nearly 102 to the dollar on Monday.

This sudden decision came after Maxim Oreshkin, President Vladimir Putin’s economic advisor, wrote an op-ed suggesting that loose monetary policy was the cause of the inflation and currency troubles. Oreshkin argued that the central bank had the necessary tools to rectify the situation.

The central bank justified its decision by stating that it aimed to limit risks to price stability, as inflationary pressure was building up. Over the past three months, price growth has averaged 7.6% annually on a seasonally adjusted basis, with core inflation rising to 7.1% during the same period.

The central bank’s board stated that the steady growth in domestic demand, which surpasses the capacity to expand output, is amplifying inflationary pressure and affecting the ruble’s exchange rate dynamics through increased demand for imports.

Despite the central bank’s previous decision to halt foreign currency purchases on the domestic market until 2024, the ruble’s decline was not halted. Russia often sells foreign currency to offset declines in oil and gas export revenues and buys it when running a surplus.

Prior to the Kremlin’s intervention, the Bank of Russia attributed the inflation and currency weaknesses to the country’s shrinking balance of trade. From January to July, Russia’s current account surplus fell more than 85% year on year.

Anatoly Aksakov, chairman of the Duma Committee on Financial Markets, stated on Telegram that “the ruble exchange rate is under state control,” according to a Google translation.

After working together to restructure the Russian economy and minimize the impact of economic isolation and sanctions from Western powers, the Kremlin and the Bank of Russia now appear to have divergent views on the causes of the currency troubles.

Analysts believe that the government’s direct intervention in monetary policy reflects the challenges faced by the country’s economy. Agathe Demarais, global forecasting director at the Economist Intelligence Unit, stated that the central bank’s earlier assessment regarding the collapse of Russia’s current account surplus being the main factor behind high inflation was correct.

Demarais explained that Western sanctions have curbed Russia’s hydrocarbon export revenues and increased import costs, which is further reinforced by the weakening ruble. She argues that the Russian currency has entered a vicious cycle that will be difficult to escape.

Following Russia’s invasion of Ukraine and subsequent Western sanctions, the ruble initially plummeted to 130 to the dollar in February 2022. The central bank implemented capital controls to stabilize the currency, eventually bringing it back to a range of 50 to 60 to the dollar by the summer of 2022.

The central bank has since loosened these capital controls to support the economy as the impact of sanctions grew. This, along with a period of low interest rates, has further entrenched the negative cycle for the ruble.

Demarais believes that blaming the central bank has become an easy tactic for the Kremlin since there are limited options to improve the situation.

Reports suggest that Russian authorities are considering the reintroduction of capital controls, such as compulsory sales of foreign currency revenues for exporters, as the central bank’s rate hike only slowed down the ruble’s decline.

Back to Capital Controls?

Economist Stephanie Kennedy from Julius Baer agrees that the most likely scenario is for the CBR to strengthen capital controls and enforce the rule that exporters must exchange their earnings from US dollars into rubles.

Kennedy explains that currency collapses are often triggered by nervous international investors or capital flight. Sanctions and capital controls have isolated Russia from the international financial system, resulting in limited trading of the ruble, especially against the US dollar.

The decline in exports since G7 countries imposed a $60 price cap on Russian crude oil in December, combined with increased imports for the war effort, has contributed to the devaluation of the ruble.

Kennedy notes that although the current account surplus has declined significantly, it remains at a tolerable level and within its historical average. A weaker currency benefits Russia’s oil revenues but increases import costs.

In June, Russian Deputy Prime Minister Andrey Belousov stated that a ruble value of 80-90 to the dollar was ideal for the country’s budget, importers, and exporters.

While it is possible that the CBR may raise interest rates to address the decline, aggressive hikes like those seen at the start of the war are unlikely. Higher interest rates would primarily hurt consumers and local businesses, further undermining public support for the war.

Julius Baer expects capital controls to be reinforced and the rule on exporters to be introduced. However, they anticipate the ruble to be around 92 to the dollar in three months and 95 in 12 months.

Kennedy concludes that although this implies a spot appreciation with a significant carry, the ruble is not easily tradable, and uncertainty about its outlook remains high.

Russia is currently facing a significant increase in inflation and a sharp decline in its currency, which has brought attention to a growing disagreement between the Kremlin and the country’s central bank.

In an emergency meeting on Tuesday, the Central Bank of Russia (CBR) raised interest rates by 350 basis points to 12% in an effort to halt the rapid depreciation of the ruble. The ruble had reached a 17-month low of nearly 102 to the dollar on Monday.

This sudden decision came after Maxim Oreshkin, President Vladimir Putin’s economic advisor, wrote an op-ed suggesting that loose monetary policy was the cause of the inflation and currency troubles. Oreshkin argued that the central bank had the necessary tools to rectify the situation.

The central bank justified its decision by stating that it aimed to limit risks to price stability, as inflationary pressure was building up. Over the past three months, price growth has averaged 7.6% annually on a seasonally adjusted basis, with core inflation rising to 7.1% during the same period.

The central bank’s board stated that the steady growth in domestic demand, which surpasses the capacity to expand output, is amplifying inflationary pressure and affecting the ruble’s exchange rate dynamics through increased demand for imports.

Despite the central bank’s previous decision to halt foreign currency purchases on the domestic market until 2024, the ruble’s decline was not halted. Russia often sells foreign currency to offset declines in oil and gas export revenues and buys it when running a surplus.

Prior to the Kremlin’s intervention, the Bank of Russia attributed the inflation and currency weaknesses to the country’s shrinking balance of trade. From January to July, Russia’s current account surplus fell more than 85% year on year.

Anatoly Aksakov, chairman of the Duma Committee on Financial Markets, stated on Telegram that “the ruble exchange rate is under state control,” according to a Google translation.

After working together to restructure the Russian economy and minimize the impact of economic isolation and sanctions from Western powers, the Kremlin and the Bank of Russia now appear to have divergent views on the causes of the currency troubles.

Analysts believe that the government’s direct intervention in monetary policy reflects the challenges faced by the country’s economy. Agathe Demarais, global forecasting director at the Economist Intelligence Unit, stated that the central bank’s earlier assessment regarding the collapse of Russia’s current account surplus being the main factor behind high inflation was correct.

Demarais explained that Western sanctions have curbed Russia’s hydrocarbon export revenues and increased import costs, which is further reinforced by the weakening ruble. She argues that the Russian currency has entered a vicious cycle that will be difficult to escape.

Following Russia’s invasion of Ukraine and subsequent Western sanctions, the ruble initially plummeted to 130 to the dollar in February 2022. The central bank implemented capital controls to stabilize the currency, eventually bringing it back to a range of 50 to 60 to the dollar by the summer of 2022.

The central bank has since loosened these capital controls to support the economy as the impact of sanctions grew. This, along with a period of low interest rates, has further entrenched the negative cycle for the ruble.

Demarais believes that blaming the central bank has become an easy tactic for the Kremlin since there are limited options to improve the situation.

Reports suggest that Russian authorities are considering the reintroduction of capital controls, such as compulsory sales of foreign currency revenues for exporters, as the central bank’s rate hike only slowed down the ruble’s decline.

Back to Capital Controls?

Economist Stephanie Kennedy from Julius Baer agrees that the most likely scenario is for the CBR to strengthen capital controls and enforce the rule that exporters must exchange their earnings from US dollars into rubles.

Kennedy explains that currency collapses are often triggered by nervous international investors or capital flight. Sanctions and capital controls have isolated Russia from the international financial system, resulting in limited trading of the ruble, especially against the US dollar.

The decline in exports since G7 countries imposed a $60 price cap on Russian crude oil in December, combined with increased imports for the war effort, has contributed to the devaluation of the ruble.

Kennedy notes that although the current account surplus has declined significantly, it remains at a tolerable level and within its historical average. A weaker currency benefits Russia’s oil revenues but increases import costs.

In June, Russian Deputy Prime Minister Andrey Belousov stated that a ruble value of 80-90 to the dollar was ideal for the country’s budget, importers, and exporters.

While it is possible that the CBR may raise interest rates to address the decline, aggressive hikes like those seen at the start of the war are unlikely. Higher interest rates would primarily hurt consumers and local businesses, further undermining public support for the war.

Julius Baer expects capital controls to be reinforced and the rule on exporters to be introduced. However, they anticipate the ruble to be around 92 to the dollar in three months and 95 in 12 months.

Kennedy concludes that although this implies a spot appreciation with a significant carry, the ruble is not easily tradable, and uncertainty about its outlook remains high.