The Russian rouble, the official currency of the Russian Federation, has experienced its fair share of ups and downs throughout its history. However, in recent years, the rouble has faced unprecedented challenges, leading to a significant collapse in its value. It is currently trading for about 1 cent US to 1 rouble. This article examines the historical context of the rouble’s decline, the government’s response, recommendations from economists considering the sanctions imposed on Russia, and the global trade implications of a weakened rouble.
The Russian rouble’s history is marked by various economic and political factors. During the Soviet era, it was relatively stable, primarily due to a closed economy and centralized control. However, the dissolution of the Soviet Union in 1991 brought economic liberalization, which had mixed consequences for the currency. In the early 1990s, hyperinflation led to a dramatic devaluation of the rouble, causing economic turmoil and social unrest.
In the late 1990s, Russia faced another severe financial crisis, leading to a devaluation of the rouble and default on government debt. The early 2000s saw a period of relative stability, driven by rising oil prices, which significantly bolstered Russia’s economy. Nevertheless, economic and political challenges persisted, particularly in the form of corruption and political instability.
In 2014 sanctions were imposed on Russia by the vast majority of countries because of its occupation of Crimea. Since then, there has been 10 further rounds of sanctions, especially after Russia’s full-scale invasion of Ukraine in February 2022. These sanctions included a ban on buying Russian oil and gas, freezing foreign assets, and barring Russia from using the SWIFT payment system.
In response the Russian government has tried to move imports of gas and oil to India and China, to force international trade to be conducted via the rouble rather than the dollar, to impose rules against capital flight of foreign currency, to use government reserves to buy roubles, to raise interest rates and to lower oil production to raise oil prices.
However, these measures have had limited success, given the persistent external pressures, including sanctions imposed by Western nations in response to Russia’s actions in Ukraine.
Economist Recommendations and Sanctions
Economists have proposed several strategies to address the rouble’s decline, taking into account the impact of sanctions. Some of the recommended actions include:
1. Diversification: Encourage diversification of the Russian economy away from its heavy reliance on energy exports. This would reduce Russia’s vulnerability to fluctuations in global oil prices, which have a direct impact on the rouble’s value.
Putin’s Russia has never seriously pursued this path. It seems economic sectors are carved up between oligarchs who focus entirely on maintaining their gooses that lay golden eggs. They see new economic sectors emerging as also emerging political threats.
2. Fiscal Discipline: Implement fiscal policies that prioritize responsible spending, reduce budget deficits, and enhance government transparency. This can improve investor confidence and attract foreign investment. Again, this seems unlikely as one very profitable source of income for officials has always been ‘skimming’. In other words, stealing government procurements to sell on illegally. The appalling state of Russian military supplies is testament to this practice’s wide-spread application.
Chinese cadres who have been doing the same thing for years pay heed: if there is war, and the armed forces appear ill-equipped, Xi will demand that heads roll.
3. Structural Reforms: Undertake structural reforms to improve the business climate, reduce corruption, and enhance economic competitiveness. These reforms can help attract foreign direct investment and boost economic growth.
Again, this advice is severely unappealing to Vladimir Putin who keeps control of his oligarchs through the threat of exposing their blatant corruption. Outside of Moscow and Saint Petersburg there is a scarcity of young, middle-class professionals needed to drive structural reforms to the economy. Thousands of these young people have fled Russia to avoid conscription and to find work.
Despite Putin being a former communist he has never been in favour of massive infrastructure projects to level up the country or to help diversify the economy that relies on natural resource exploitation.
4. Diplomatic Solutions: Seek diplomatic solutions to ongoing geopolitical conflicts to mitigate the impact of sanctions. Improved relations with Western nations could lead to the easing of sanctions, thereby reducing economic pressure on the rouble.
This is the hoped for solution by those inside and outside Russia that want to end the tragic and ongoing loss of life in the war in Ukraine. All eyes are on Putin. Other than Recep Tayyip Erdoğan of Turkey, Modi in India and Xi in China few world leaders can meaningfully engage with the Russian president. The international community would love the war to end so that they could go back to buying cheap Russian gas (especially the Germans) but their electorates are strongly behind the Ukrainian resistance. Moreover, Putin is widely thought to be like Hitler in that any international deal struck with him is not worth the paper it is written on.
Global Trade Implications
A weakened Russian rouble has significant implications for global trade:
1. Reduced Imports: A weak rouble makes imports more expensive for Russian consumers and businesses. This can lead to a decrease in imports, affecting foreign companies that rely on the Russian market.
2. Export Competitiveness: On the flip side, a devalued rouble can make Russian exports more competitive on the global stage, particularly in energy-related industries. This can have both positive and negative impacts on other energy-exporting nations. However, with sanctions in place many companies cannot take advantage of the cheap rouble
3. Economic Uncertainty: A collapsing rouble can contribute to global economic uncertainty, as it may indicate broader geopolitical instability. This can affect investor confidence and global financial markets.
4. Supply Chain Disruptions: Companies with supply chains reliant on Russia may face disruptions due to currency instability and sanctions. This can lead to increased costs and delays in production.
In global terms these disruptions slow trade and cost money. The main sectors affected are food (Russia and Ukraine export 28% of global wheat) and nitrogen fertilizer (25% of world total). Russia relies very little on the manufacture of items for long-tail supply chains. Rather they provide the raw materials such as oil, gas, rare metals and timber.
If you compare how deeply embedded China is into global supply chains, especially for small-to-medium cost products such as cars and smart phones, Russia’s partial withdrawal from production has not caused any long-lasting damage to supply chains as alternatives have been sourced.
The collapse of the Russian rouble is a complex issue deeply rooted in historical and geopolitical factors. The Russian government’s response and economist recommendations offer potential pathways for stabilization. However, the impact of sanctions and the broader global trade implications make this a multifaceted challenge with far-reaching consequences for Russia and the international community. Finding a sustainable solution will require a combination of economic reforms, diplomatic efforts, and global cooperation. The risk for Putin is that as the world decarbonises and looks for a new model for globalisation the need for a stable rouble becomes less relevant. A stable Russia, however, is another matter.