Russian Ruble Drops Again! Putin’s Economic War Strategy?

AllvertaGlobal – The Russian ruble, which was previously the best currency in the world, fell again against the United States (US) dollar last week. The reversal of the ruble cannot be separated from the policies of President Vladimir Putin and the Russian central bank (Central Bank of Russia / CBR).
Based on Refinitiv data, over the past week the ruble fell by 7.6% to the level of RUB 64/US$. So far this year the ruble has recorded a gain of around 12%.

While being the best currency in the world, the ruble has gained more than 20% against the US dollar and is at its strongest level in the last 4 years. The strength of the ruble surprised the market, because in early March its value fell by more than 100% and touched the weakest level in the history of RUB 150/US$.

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The drop in the ruble made CBR raise interest rates from 9.5% to 20%. President Putin also implemented a capital control policy. Sales of Russian gas and crude oil are also denominated in rubles.
A series of policies made the ruble reversed and became the best currency in the world.

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However, on the other hand, the strength of the ruble has a negative impact on the Russian economy. The selling price of gas and oil and other export products is becoming more expensive, which of course makes the state’s income tight.

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“The stronger the exchange rate, the bigger the budget deficit. This strengthening will make it difficult for exporters, increase costs and reduce income,” said Evgeny Kogan, professor at the Higher School of Economics in Moscow, as reported by Bloomberg, Monday (23/5/2022). ).

According to Kogan, the ruble exchange rate that supports the economy is in the range of RUB 78 – 80/US$.
President Putin finally relaxed his capital control policy last week. Russian companies that were previously required to convert 80% of their foreign exchange into rubles have now been reduced to 50%. In addition, with inflation under control, CBR turned to aggressively cutting interest rates.

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The combination brought the ruble’s strengthening to a halt.
Within one month, CBR cut interest rates 3 times by 300 basis points each to 11%.
The Governor of CBR, Elvira Nabiullina, as quoted by Reuters, said that inflation risks began to subside, but warned that the economy was entering a period of structural transformation and banks needed capital support. The reduction in interest rates is expected to help banks.

In addition, Nabiullina said that the ruble exchange rate which turned stronger had a significant impact on easing inflationary pressures.

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“Thanks to the strengthening ruble, inflation fell faster than we expected. This allowed us to lower interest rates without triggering a new inflation hike,” Nabiullina said, as reported by Reuters.

He also stated that there is still room to lower interest rates again, so that it can spur the economy.
This policy is now in contrast with Western countries that are aggressively raising interest rates. The US central bank (The Fed) became the most aggressive, even the United States economy is now predicted to experience a recession due to the increase.

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