Supplies from China are about to become more expensive.
At first glance, it did not look that different from other sanctions. On November 21st America’s Treasury Department imposed new restrictions on more than four dozen Russian banks, including Gazprombank, the financial arm of the giant state gas firm. The bank, the largest in Russia not already subject to American sanctions, had been excluded from previous packages in order to allow some central and eastern European countries, including Austria, Hungary and Slovakia, to continue paying for imports of Russian gas. After December 20th, when the measures take full effect, European buyers of Russian gas will be forced to find workarounds involving either third-party banks or currencies other than the dollar, which will take time.
America’s announcement came at a bad moment for the Russian economy, meaning that foreign-exchange markets were quick to respond. The prospect of new restrictions on access to hard currency sent the rouble down by 10% against the dollar to a low of 115 on November 27th, before the central bank inspired a modest rally by using its reserves to buy roubles.
Even after this rally, the rouble is still down by 8% against the dollar over the past month and by more than 15% in the year so far. Russia’s currency is at its weakest since immediately after the invasion of Ukraine in February 2022. The government is putting a brave face on the news. Speaking in Kazakhstan on November 28th, Vladimir Putin told reporters that “there are certainly no grounds for panic.”
For foreign-exchange traders, such denials are usually a sign that something is wrong. Indeed, the latest fall in the rouble’s value makes the job of Russia’s central bank much more difficult. Wartime spending has used up spare capacity in the economy, driving down unemployment to just 2.4%. The government’s latest budget, unveiled in September, will raise defence and security spending by another 25% next year, to around 8% of Russia’s GDP, a post-cold-war high. Annual inflation is running at more than 8%.
In this context, a weaker rouble is a doubled-edged sword. A lower level against the dollar increases the rouble value of oil exports, helping plug the government’s widening deficit. Yet it also pushes up the price of imported goods—something that matters for both consumers and the government’s war effort.
Analysts note that Russian imports of consumer goods usually rise as Christmas approaches. On November 28th Dmitriy Pianov, deputy chairman of VTB, Russia’s second-largest bank, told Interfax, a news agency, that the rouble’s decline over the previous few days was “a strong inflationary factor”. Moreover, China has become Russia’s most important trading partner in recent years, providing more than a third of all imports, as well as high-tech inputs that are crucial for the armed forces. The rouble has fallen by 7% against China’s yuan in the past month, which will raise the cost of military equipment.
Against a backdrop of high inflation and fears over the value of the currency, Russia’s central bank has already lifted interest rates to 21% this year. Traders now expect rates to end the year at 25%, up from expectations of 23% before the recent slide in the rouble’s value. So far, the Russian government has shielded both consumers and firms from the effects of higher rates via a variety of subsidised-borrowing schemes. But with public finances under pressure, support has recently been scaled back.
Mortgage volumes were declining and firms were warning of investment delays even before the latest round of sanctions. Speaking on November 19th Elvira Nabiullina, governor of the central bank, acknowledged that monetary policy had reached a “tipping point” and that growth in corporate lending would now begin to fall, constraining demand.
The combination of a declining currency and a ballooning budget deficit has led to talk of a hard landing for the Russian economy in 2025. After two years of strong growth, which has confounded many analysts’ gloomy predictions, the pace of expansion will slow sharply. The economic bill for the war is at last coming due. It could be a big one. ■
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Chart: The Economist
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