Russian ruble slides to 16-month low against U.S. dollar as capital flight, shrinking trade surplus bite

Weakness in the ruble has intensified over the past week weeks, and just a few days ago the Russian central bank announced it would halt buying of foreign currency on the open market through the end of the year. Instead, it will rely on Russia’s National Wealth Fund’s largess to supply them. The decision was enacted with the intention of “reducing volatility” in financial markets. The central bank has also said it’s launching a digital-ruble pilot program.

Economists, including Konstantin Sonin, a political economist at the University of Chicago, have blamed capital flight and falling budget revenues (due to lower oil and gas income and tax revenue) for the ruble’s troubles.

Data released by Russia’s central bank last week showed Russia’s current-account surplus has shrunk markedly during the first seven months of the year to an estimated $25.2 billion, compared with $165.4 billion during the same period in 2022. The central bank blamed the decline on a shrinking trade surplus caused by the drop in crude oil prices since the first half of 2022.

The Bank of Russia, the country’s central bank, has attempted to shore up the ruble with little benefit. Last month, the central bank hiked interest rates by 100 basis points, the first increase since before Putin ordered the invasion of neighbor Ukraine in February 2022. It hinted that more hikes were possible.

A weak ruble was one reason for the hike, as the weak currency has caused inflation to accelerate.

While the ruble remains weak, it’s still holding above its lows around 130 to the dollar seen in March 2022, weeks after the West imposed a first round of sanctions on Moscow following the invasion of Ukraine, which has morphed into a bloody stalemate with no end in sight.

The annual inflation rate rose to 4.5% in July from 3.25%, but economists at Goldman Sachs warned in a note earlier this month that inflation will likely head above the bank’s target again.

“With continuing loose fiscal policy, we expect inflation to continue to rise throughout the year to +7.0% yoy [year-over-year] in December, above the CBR’s July inflation forecast range of +5.0% – +6.5%,” said a team of economists led by Kevin Daly.

Russian officials have blamed the ruble’s latest bout of weakness on the central bank. Oreshkin Maxim, Putin’s economic aide, wrote in an editorial published in state media outlet Tass on Monday, that “loose monetary policy” was to blame for the weak ruble and urged action on that front.

“The Central Bank has all the necessary tools to normalize the situation in the near future and ensure that lending rates are reduced to sustainable levels,” he wrote.

Many economists and currency strategists expect the ruble’s slide to continue. However, a recent rebound in global crude-oil prices is leading to a modestly improved outlook.

In the U.S., West Texas Intermediate crude for September settled at $84.40 a barrel on Wednesday, its highest level of 2023, according to FactSet data. That reflects a wider trend of rising energy prices globally. However, prices remain well below the peak of roughly $130 a barrel from March 2022, when prices spiked in the immediate aftermath of the invasion.