Russia’s Ruble suffers amid persistent efforts to defeat America

The Russian ruble has been experiencing a decline, a drastic one at an alarming rate. Previously, this kind of decline would have been a cause for concern, but not anymore. With the currency currently heading to 100 per dollar, Russia is not moving muscles in a bid to rescue, showing that a bigger game is at play.

According to anonymous sources familiar with the inner workings of the country, a weaker ruble provides greater benefits to the country. With government expenditures expected to rise next year, the development could work in favor of the state budget. The sources also claimed that officials at the Kremlin are fine with the currency dropping to 100 per dollar.

The decline in the value of the currency has also been worsened by the method the Central Bank employs to calculate its value. There has been a significant change in the method because the Moscow Exchange has halted the trade of the dollar and euro.

The shortage of foreign currency, due to the sanctions on the country, has further worsened since the United States asked entities to exit the Moscow Exchange on October 12.

The ruble is now 9% weaker than it was on the last day it traded before the sanctions took full effect. Despite the inflationary effect of the decline, former Bank of Russia top official Oleg Vyugin has brushed it off.

Impact of Russian Ruble decline on the Chinese Yuan

The Russian ruble has also posted losses against the Chinese yuan, the country’s preferred currency since the sanctions as a result of its Ukraine invasion hit in 2022.

The Ruble has lost about 11% against the yuan, trading at 13.26 per yuan, its lowest since May. Last year when the currency traded at 100 against the dollar, the central bank undertook an emergency decision to hike interest rates by 350 basis points.

Later in the year, the government announced tougher capital controls, mandating 43 export-based companies to repatriate about 80% of their foreign earnings and sell most of it for rubles in the local market.

The Ministry of Economy has forecasted that the ruble will remain weak for the time being. However, forecasts for next year have shown that the average ruble is expected to be around 96.5 per dollar compared to 91.2 per dollar this year.

In June, the US discussed the threats of imposing a secondary sanction on the key trading partners of Russia’s central bank. The sanctions might prevent businesses from accessing foreign currencies from places like China and Turkey.

Russia responded to it by cutting measures put in place to help the ruble grow. The mandatory conversion of proceeds from exports was decreased to 25% from its normal 50%. The figure was initially cut to 60% in June and then 40% in August.

Due to the move, large Russian exporters cut their currency sales by 30% in September, choosing to carry out more transactions in Ruble.

Inflation and payment problems compound woes

The response adopted by Russia after the war initially made the ruble drop, but it soon rebounded after the central bank pushed interest rates to 20%.

Although it has dropped slightly to 19%, there is a likelihood that it will be increased when officials of the bank meet next week to deliberate on the effects of the war on the economy and inflation. Presently, Russia’s inflation is more than double the projected 4%.

Exporters are also feeling the pain of the development, as liquidity issues are disrupting payments from foreign banks. Companies are also facing challenges meet cash obligations due to unpredictable cash flows.

The issue is not abating anytime soon as borrowing costs for domestic and foreign currencies have surged to about 20%. Russia is relying on the yuan as its available foreign currency, however, it is dried up leaving exporters with issues.

There are also payment management issues with most companies relying on manual payments. Executives from companies anonymously mentioned that they have had to repeatedly explain to banks that their transactions are not breaching sanctions.

Despite these assurances, the payments often take longer times to be approved while also running the risk of refusal. During a previous meeting between Russian President Vladimir Putin and the country’s Security Council, he mentioned that cross-border payments have become a serious issue.

Meanwhile, Putin is working on a payment system to be used within the BRICS, a method that will be discussed when the member nations meet in Kazan this month. According to rumors, the system will be built on a blockchain.

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