Russian rouble falls past 100 to dollar after boost from higher interest rates fades

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The rouble sank beyond 100 to the US dollar on Tuesday, confounding Russian authorities’ attempts to halt a steep decline this year and pushing it close to levels hit in August.

Russia’s currency has lost nearly a quarter of its value since Moscow’s full-scale invasion of Ukraine in February 2022, as western sanctions weigh on export revenues and widen the country’s budget deficit.

The rouble last broke through the 100 mark in August, sparking alarm on state media and forcing the central bank into an emergency interest rate rise of 3.5 percentage points. A further rate increase of 1 percentage point — to 13 per cent — and talk of capital controls have failed to halt the currency’s decline.

The Kremlin tried to shrug off the rouble’s fall, claiming its weakness was a fact of life.

“There are certain fluctuations. We live in the rouble zone, so this excess attention to the dollar rate may happen from an emotional standpoint, but it’s essentially an element of the past,” Kremlin spokesperson Dmitry Peskov told reporters on Tuesday.

“We need to get used to living in the rouble zone and not feel so dependent on the dollar rate,” he added, according to Interfax. “There is no reason to be alarmed.”

Analysts said the latest losses were due to the end of the favourable month-end tax period, which prompts exporters to convert foreign currency revenues to pay local liabilities and tends to temporarily support the currency.

A ban on exports of diesel and petrol that Moscow imposed in September to counter rising energy prices in Russia and which led to a decline in foreign currency inflows has also put pressure on the rouble.

“The demand for foreign currency in Russia remains much higher than the supply,” said Natalia Lavrova, chief economist at BCS Global Markets. “Companies need the currency for imports and to buy assets of foreign businesses that want to withdraw from the Russian market, while foreign currency remains attractive as a savings vehicle for consumers.”

A weaker currency fuels inflation by making imports more expensive. The 100 roubles per dollar threshold carries a particular psychological importance for Russian consumers. Breaching that level in August sparked rare public disagreements among top Russian officials, while a news agency said its ticker was hacked after a message was displayed insulting Russia’s president Vladimir Putin.

The rouble’s current decline comes at a time when policymakers are particularly sensitive to public opinion, as Putin is widely expected to soon announce he will take part in the presidential election coming up next year.

Putin last month expressed concern over the impact a weak rouble has on the country’s inflation levels. “It is obvious that one of the main issues right now is accelerating inflation,” he said.

“The main factor here is clear — it is the weakening of the rouble, and it is necessary to understand the causes behind this, and to make appropriate decisions without delay.”

The government is discussing further measures to halt the rouble’s slide, including forms of capital controls such as limiting bank transfers abroad or creating a “Chinese-style membrane between the onshore and offshore rouble markets”, as the Ministry of Economic Development proposed in late September.

If enacted, the proposals would mark the first time Russia has tightened currency controls since the early weeks when Putin ordered the full-scale invasion of Ukraine, and would indicate growing anxiety over the country’s economic prospects.

The central bank, which switched from a policy of targeting the exchange rate to a focus on inflation in 2014, has opposed the proposal. But its own instruments to limit the rouble’s slide are limited.

The economic development ministry, whose forecasts lay the basis for the country’s budget, expects the rouble to recover to an average of 90.1 per dollar in 2024, according to its most recent projections released last month. Most Russian market analysts and economists expect it to be in a range between Rbs89 and Rbs105 per dollar.