Russia’s central bank has announced it will hold an extraordinary meeting on Tuesday to discuss the level of its key interest rate after the rouble fell to its weakest point in almost 17 months.
The currency has been steadily losing value since the beginning of the year and slid past the psychologically important level of 100 to the dollar on Monday morning.
It has weakened by 26% this year as a result of a collapse in export revenues and growing military spending, making it the third worst-performing global currency in 2023. The decline has led to calls from senior Kremlin officials for higher borrowing costs.
On Monday morning, the central bank said it saw no threat to Russia’s financial stability from the rouble’s fall, blaming the currency’s slide in value on a drop in export volumes and growing internal demand for imports.
However, in the afternoon the Bank of Russia made the surprise announcement that its board of directors would meet on Tuesday to discuss the interest rate, with a decision to be published at 10.30am Moscow time.
The rouble has had a period of turbulence since Russia invaded Ukraine in February 2022, dropping to a record low of 150 to the dollar two weeks after the start of the war before sharply recovering after the Russian central bank imposed strict capital controls that limited the flow of money out of the country.
By last summer the rouble had rebounded to a seven-year high as a rise in oil and gas prices, partly a result of the invasion, helped Russia raise export revenue while consumer imports fell.
Russian oil revenues have been drastically reduced since western price caps and embargos were imposed, while imports have recovered. The government has spent billions on the defence industry to continue the war in Ukraine, with many critical goods still coming from abroad.
The fall in the rouble accelerated after the aborted uprising in June by Yevgeny Prigozhin and his Wagner group of mercenary fighters caused Russians to move money into foreign accounts.
Dr Janis Kluge, a researcher who focuses on the Russian economy at the German Institute for International and Security Affairs, a thinktank, said: “The Russian rouble is still searching for its appropriate long-term war-sanctions exchange rate. Without capital controls, speculators would have priced in the poor outlook last year.”
A senior Kremlin aide admitted on Monday that a weak rouble had a “negative effect” on the “population’s real incomes” but said Moscow expected the currency to bounce back shortly.
“The current exchange rate has deviated significantly from fundamental levels, and its normalisation is expected in the near future,” Vladimir Putin’s economic adviser Maxim Oreshkin said in an op-ed for the Tass news agency. “It is in the interests of the Russian economy to have a strong rouble.”
Last week the Russian central bank took steps to stabilise the rouble, holding purchases of foreign currency until 2024 “to reduce volatility”. But the move did not immediately stop the currency’s decline, raising worries among Russian policymakers of the possibility of significantly higher consumer prices.
In the short term, a weaker rouble could help the authorities to fund its extensive war spending. Russia sells its oil in foreign currency and the current exchange will buy more roubles at home. A government document reviewed by Reuters this month showed that Moscow had doubled its 2023 defence spending target to more than $100bn (£79bn), a third of all public expenditure.
But the sliding rouble could trigger memories in Moscow of the battering the currency took during the 1998 Russian financial crisis and has already led to rare public criticism of Russia’s central bank.
The influential TV host Vladimir Solovyov said last week: “The bloody central bank isn’t even explaining why the hell the rouble exchange rate has jumped so high that they’re laughing at us abroad, at our rouble being one of the three weakest currencies.
“What is happening in this country!? How did this exchange rate come about? Eventually, this will lead to a rise in consumer prices, and it will coincide with the election campaign,” Solovyov added, referring to the Russian presidential election scheduled for March 2024.
The Kremlin has boasted about Russia’s economic outlook while the central bank has predicted that the economy will grow by up to 2.5% this year, despite crippling western sanctions.
Despite the weakening rouble, Russia’s statistics agency, Rosstat, announced last week that the economy grew year on year by 4.9% in the second quarter of 2023, the first increase in 12 months.
Experts said much of the economic recovery was artificially driven by government spending on the war, raising the prospect of an economic slowdown if the conflict was halted.
