The Russian ruble dropped below RUB100 to the dollar on August 14 for the first time since the war in Ukraine began. The fall comes despite the Central Bank of Russia (CBR) announcement last week that it would suspend the so-called budget rule and would not purchase foreign currency again for the rest of this year in an effort to shore up the battered currency. (chart)

Russia's currency has lost a quarter of its value this year against the dollar this year, making it one of the worst-performing emerging-market currencies in the world, on a par with the Turkish lira and the Argentine peso.

Compared to last year, when a 10% emergency hike by the CBR in the first week of the war saw the ruble dramatically strengthen, the ruble has lost half its value of that peak of RUB53 to the dollar.

The CBR said in a recent note that the currency had lost value due to fluctuations in the import revenues. A drop in revenues for Russian oil and gas exporters this year has also contributed to the ruble's weakening, according to the CBR.

The latest central bank data indicates a decline in revenues from $16.8bn in July of the previous year to $6.9bn in July this year. An increase in the ability to move money abroad has additionally accelerated capital flight, as individuals and businesses rush to transfer funds to foreign accounts and the CBR has reported that capital flight as increased significantly.

“The weaker rouble is a damning indictment of Russia’s war on Ukraine,” Timothy Ash, the senior sovereign strategist at BlueBay Asset Management in London said in emailed comments. “It is being driven not only by lower energy receipts due to the loss of the bulk of the European gas business but also by the success of the G7 oil price cap, the much higher cost of imports due to sanctions and then continued capital flight. The response will likely be higher policy rates and capital controls which will mean higher inflation, and ultimately lower growth.”

The CBR’s Deputy Governor Alexey Zabotkin emphasized that the central bank remains committed to a floating exchange-rate policy, which enables the economy to adapt to changing external conditions.

Chris Weafer, the founder and CEO of Macro Advisory and former head of research at multiple Moscow-based investment banks, has argued that the CBR has actually engineered the weakening of the ruble on purpose to support the budget. As oil revenues are denominated in dollars in the budget but converted to rubles to meet payments, a devaluation creates more rubles for the government to spend and helps narrow the deficit. As bne IntelliNews reported, the deficit has fallen dramatically in recent months and is currently only 1.8% of GDP – back inside the Ministry of Finance (MinFin)’s target of 2% of GDP.

Despite the ruble's decline, Russian officials have downplayed the risks to financial stability, attributing the currency's weakness to deteriorating foreign trade conditions. However, analysts suggest that stabilizing the ruble would require a policy interest rate increase and careful fiscal management to ensure budgetary stability.

The CBR has already put through a surprise 100bp hike in July and I expected to hike again at its next meeting.

“To stabilize the ruble, we estimate the policy interest rate needs to rise closer to 10% and federal budget spending must be kept within the fiscal ceiling. The ruble may benefit from higher crude oil prices, but domestic monetary policy will remain a more reliable anchor for the currency. The Bank of Russia will need to hike the policy rate by 50-100 basis points at its September 15 meeting to boost domestic savings and reduce imports.” —Alexander Isakov, Russia economist. For more, click here Revenues of Russian oil and gas exporters declined to $6.9bn in July from $16.8bn in the same period last year, according to the latest central bank data. An easing of restrictions on moving money abroad has also led to accelerated capital flight as Russians race to shift funds into foreign accounts,” Alexander Isakov, head of Russia and CIS macroeconomics at Bloomberg, said in a report.

Central bank Governor Elvira Nabiullina has repeatedly pointed to the deterioration in foreign trade conditions as the main reason for the ruble’s weakness, while ruling out intervention to support the exchange rate.