Why is everyone dumping the Russian ruble?

Sanctions or not, Ruble penalty cannot be wished away

The Russian ruble has finally broken the 100 barrier against the dollar. This marks the fourth time the ruble has hit this psychological threshold since the start of Putin’s invasion, but the current conditions are incomparable to the last three instances.

The first time the ruble breached this barrier, Putin was only two weeks into the war. The market responded with panic as global sanctions against the Russian regime came fast and furious. However, Putin was prepared. Interest rates were around 6 percent, and Russia’s national wealth fund, the country’s “savings piggy bank,” held approximately $150 billion.

The central bank intervened quickly, ramping up interest rates, halting capital outflows, and driving the ruble back down as sharply as it had risen. In July of last year, the ruble approached the 100 barrier twice, but at that time, the economy was still expanding due to Putin’s steady state investments. Inflation was rising, but it remained manageable, and the breach was short-lived.

Now, however, we are back at 100.

• Inflation has reached double digits, and food prices have soared across the country. Potatoes now cost 54% more than they did at the beginning of the year.

• The interest rate stands at 21%, leaving little room for further increases. At this rate, a business would need to make over a 50% profit on a loan just to repay it, making loans an unattractive option for business investment. Consequently, business bankruptcies in Russia have surged.

Corporate bankruptcies in Russia have jumped by 20% this year as soaring interest rates and liquidity shortages push firms closer to financial ruin, according to data from the Unified Federal Registry of Bankruptcy Declarations (Fedresurs), Meduza reports.

The uptick in insolvencies, though initially concentrated in the first quarter, is poised to accelerate as tighter monetary conditions make debt servicing increasingly unsustainable.

So, here we are. National savings are nearly depleted, and raising interest rates further would only accelerate corporate bankruptcies. Putin can’t stop drafting 1,500 soldiers a day from the workforce, as he needs them to hold the frontlines in Ukraine.

He can’t fight inflation and the war simultaneously. The real issue emerging is that even if Donald Trump were to lift sanctions on Russian oil, it would hardly make a difference. Putin is already selling oil above the price cap imposed by Europe and the United States, and oil sales are already back to pre-war levels. Europe is not going to buy gas from Gazprom to rescue the struggling gas giant.

Even if Trump tried to pursue that path, it would take time for any effect to trickle down to the Russian economy, and the impact would be minimal. Putin has managed to circumvent sanctions at nearly every level due to weak enforcement measures.

Putin’s economic situation has become so dire that he may not have another six months to sustain the war.

Yesterday, Marc R. DeVore, a senior lecturer at the University of St. Andrews’ School of International Relations, and Alexander Mertens, a professor of finance at the National University of Kyiv-Mohyla Academy, sounded the alarm over Russia’s war economy:

Russia is losing around 320 tank and artillery cannon barrels a month and producing only 20. The Russian engineering industry lacks the skills to build rotary forges; in fact, the world market is dominated by a single Austrian company, GFM. Russia is unlikely to acquire more forges and increase its production rate, and neither North Korea nor Iran have significant stockpiles of suitable replacement barrels. Only a decision by China to provide barrels from its own stockpiles could stave off Russia’s barrel crisis.

To resupply its forces, Russia has been stripping tank and artillery barrels from the vast stockpiles it inherited from the Soviet Union. But these stockpiles have withered since the start of the war. Combining current rates of battlefield loss, recycling from stockpiles, and production, Russia looks set to run out of cannon barrels some time in 2025.

Russia cannot produce enough weapons. They cannot fight inflation and the war at the same time. Ukraine’s path to victory may now be opening, thanks to the economic strain facing Russia. The key for Ukraine will be finding a way to stay in the fight for the next six months.

Even maintaining an active defense could be sufficient; if Russian forces shift to a defensive stance, Ukraine can then shift to an offensive posture.

Since the West has taken no steps to stop North Korea from supplying weapons and soldiers to Russia, this will remain Putin’s best option for staving off a collapse. But even with that support, will it halt the rising wave of bankruptcies? Will it enable Russian Central Bank Chief Elvira Nabiullina to lower interest rates? Will it reverse inflation?

No.

Time has shifted in Ukraine’s favor — they just need to hold on.