Russia's ruble has fallen a long way in recent months, and the country’s central bank has stepped in to try to halt the slide.
Until now, the government stood aside as the declining ruble helped its budget. But a weaker currency also poses the threat of higher prices for everyday people in Russia — and the government has finally moved to halt the drop.
Here are key things to know:
Russia is selling less abroad — mainly reflected in falling revenue from oil and natural gas — and it's importing more. People or companies importing goods to Russia means selling rubles for foreign currency like dollars or euros. That lowers the ruble's exchange rate.
Russia's trade surplus — meaning it sells more goods than it buys — has shrunk. Previously, Russia saw a large trade surplus — which typically supports a country’s currency — because of high oil prices and plummeting imports after invading Ukraine.
But oil prices have dipped this year, and it's more cumbersome for Russia to sell its oil due to Western sanctions, including price caps on crude and oil products like diesel.
Meanwhile, imports have started to recover after nearly a year and a half of war as Russians find ways around sanctions. Some trade has been rerouted to Asian countries that are not participating in sanctions. And importers have found ways to ship goods through nearby countries such as Armenia, Georgia and Kazakhstan.
At the same time, Russia has ramped up defense spending, pumping money into companies that make weapons, for instance. Companies must import parts and raw materials, while some government money winds up in the pockets of workers who buy imported goods.
That government spending, along with the willingness of India and China to buy Russia oil, is helping the economy perform better than many had expected. The International Monetary Fund said last month that it expects Russia's economy to grow 1.5% this year.
To fight inflation, first of all.
A weaker ruble worsens inflation by making imports more expensive in Russian currency. And the ruble's weakness is increasingly being passed through to prices people pay. Inflation hit 7.6% over the past three months.
Higher interest rates will make it more expensive to get credit, and that should limit domestic demand for goods — including imports. So the central bank is trying to cool off the domestic economy to lower inflation.
It raised its key interest rate from 8.5% to 12% at an emergency meeting Tuesday after the ruble's fall was criticized by a Kremlin economic adviser.
Sanctions are having an impact even if they are not collapsing the economy. Exports — and thus the ruble — have fallen because Western allies have boycotted Russian oil and imposed a price cap on oil exports to non-Western nations. The sanctions prevent insurers or shippers who are mainly based in the West from handling Russian oil above $60 a barrel.
The cap and boycott have forced Russia to sell at a discount and take expensive steps such as obtaining a fleet of ghost tankers that are beyond the reach of sanctions.
However, higher oil prices have recently sent the cost of Moscow’s supplies above the price cap, the International Energy Agency said in an August report.
Oil revenue fell 23% in the first half of this year but Russia still earned $425 million a day from oil sales, according to the Kyiv School of Economics.
The rebound in imports shows that Russia is finding ways around sanctions and boycotts. It's expensive and cumbersome, but if someone needs an iPhone or a Western-made car, they can get it.
No, says Chris Weafer, CEO of Macro-Advisory Ltd. "The lower ruble is partly a reflection of the effect of sanctions, but it doesn’t indicate an underlying economic crisis."
The falling ruble actually has helped the government with its budget. It means more rubles for every dollar of earnings from oil and other products Russia sells. That bolsters spending on the military and on social programs aimed at blunting the impact of sanctions on the Russian people.
“They’ve tried to compensate for the drop in the dollar value of oil receipts with the weaker ruble, so that therefore the deficit in terms of spending could be contained and more manageable," Weafer said.
Amid sanctions and restrictions on moving money out of the country, the ruble exchange rate is largely in the hands of the central bank, Weafer said. It can tell major exporters when to exchange their dollar earnings into Russian currency.
“The weakness was planned, but it’s overdone and they want to pull it back," Weafer said.
Janis Kluge, a Russian economy expert at the German Institute for International and Security Affairs, said the ruble decline is “not very welcome” to the Kremlin.
While not a full-blown crisis, “this is the closest we came to a real economic problem since the start of the war,” Kluge said.
The chaos at the start of sanctions was far worse, but since then, the ruble decline “is the first time that something seems to be not so much under control,” he said.
Any boost to the budget from a lower ruble, he said, is offset by higher spending on government wages and pensions, which are indexed to the inflation caused by the lower ruble.
“Whatever gives the impression of a weak or unstable economy is not welcomed by the Russian government,” he said. "In Russia, the exchange rate is always seen as the most important indicator of the health of the economy.”
Inflation caused by ruble devaluation hits low-income people hard because they spend more on necessities like food.
While higher interest rates will dampen economic growth, relieving some pressure on prices, the government is unlikely to back off on military spending.
“So it's a clear prioritization of the government of this war over the welfare of households,” Kluge said.
Foreign travel — enjoyed mostly by a minority in big cities like Moscow and St. Petersburg — gets much more expensive with a weaker ruble.
“The instability of the national currency always has a not so good impact," said Dina Solovyova, 51, a veterinarian. "Most likely, this will affect ordinary people, because the rise in prices for everything will surely follow. We’ll wait and see.”
Nikolay Rubtsov, a 20-year-old student, indicated he wasn't much disturbed by the ruble's fall.
"This is all temporary. I think everything will be back to normal soon. I don’t think it can last long,” Rubtsov said in Moscow.
This story was first published Aug. 15, 2023. It was updated on Aug. 31, 2023, to correct the name of Chris Weafer’s firm. It is Macro-Advisory Ltd, not Macro Advisory Partners.