Putin's Officials Scramble to Keep Ruble From Collapsing

Russia's Central Bank has hiked interest rates at its first emergency meeting since the start of Moscow's full-scale invasion of Ukraine, after the ruble plummeted against the dollar.

The bank's decision on Tuesday to increase interest rates from 8.5 percent to 12 percent was higher than the 10 percent per annum that most analysts had expected and followed the ruble sliding past 100 to the U.S. dollar the day before.

Before the decision, the Russian currency had rallied, rising by over two percent to around 95 against the dollar before dropping back below 98.

The central bank suggested that increasing demand at home was causing the economy to overheat and that there was an increased expectation of inflation.

It said its decision was aimed at bringing inflation down to 4 percent by next year, from the current level of 4.4 percent. The central bank had been warning of inflationary pressures for around a year following the partial mobilization of 300,000 reservists in September.

Russia's economy has become increasingly militarized, with estimates released this month showing that more than a third of the state budget for this year, or more than $100 billion, will go on defense. Russia has also had to weather international sanctions.

A fall in export sales, a recovery in imports and increasing spending to fund Russian President Vladimir Putin's invasion of Ukraine have all contributed to a weakening ruble and rising inflation.

However, Chris Weafer, chief executive officer of strategic consultants Macro Advisory Ltd, told Newsweek that because the ruble has been a managed currency since March 2022, the central bank's decision did not reflect a market crisis or imminent economic collapse in Russia.

He said the priority last year was to bring down inflation that peaked at 18 percent in March-April 2022, which was achieved by keeping the ruble close to 60 versus the dollar.

This policy changed when the ban on Russian oil exports to Europe started in December and the central bank worked with the finance ministry and the main export earning companies to compensate for the steep decline in oil taxes.

"It means they have managed the ruble down versus the U.S. dollar to compensate for the lower dollar-based earnings," said Weafer, who has been reporting on Russia's economy since 1998.

"But it seems as if they panicked a little in June, when the recent wave of devaluation started," he said, adding "the ruble has overshot on the way down."

"People are much less affected by the weak currency than used be the case," Weafer said.

He expects the ruble to stabilize around 90 to the dollar by the fall.

This is because there is more localization for goods and services and a switch to Chinese and Turkish suppliers, although the government is clearly concerned about inflation that will be the priority again for the central bank, he said.

Sanctions have strained Russia's budget and led to reduced state spending in areas other than the military, employment support and social spending, said Weafer. However, the economy is not facing a collapse or an imminent crisis and, therefore, the Kremlin is not under pressure to change its actions.

"There is enough money to maintain stability, although at the expense of economic growth," he said.