The Russian economy, oriented towards war spending, is facing increasingly serious problems. One of the visible indicators of this development is the exchange rate of the Russian ruble, which weakened above 113 rubles per US dollar this morning. This is the weakest level since the start of the war in Ukraine and the imposition of sanctions imposed by the West on Russia in response to its military aggression.
The latest drop in the ruble is a result of threats of new sanctions from the US, this time aimed at Gazprombank – the third largest bank in Russia. The bank plays a key role in processing payments for Russian exports, particularly energy commodities bound for Europe, and has so far been largely spared the harshest measures.
Although the weak ruble benefits Russian exporters in the short term, it poses a serious problem in the long term. It is questionable where and under what conditions Russian companies can export their products, since a significant part of their exports depends on intermediaries in third countries. In addition, these intermediaries take away a large part of the margins, which reduces the profitability of Russian trade.
Further tightening of sanctions could further complicate Russia’s already disrupted trade channels. This is expected to affect not only exports of energy raw materials, but especially imports of key goods and technologies needed to sustain the war effort. A weak ruble makes imports more expensive because importers have to spend more rubles to maintain the same sales in their domestic currency. These problems are also transmitted to ordinary citizens, who are faced with rising prices and shortages of certain types of goods. Inflation in Russia is already high – according to official data, it should reach 8.5% in 2024, while the prices of basic foods, as indicated by the so-called “borscht index”, have risen by more than 20% compared to the previous year.
Households will also feel the impact of increased taxes, since next year up to 40% of the state budget should be allocated to national security and military expenditures. Of course, this also includes higher expenses, for example for maintaining order and efforts to restore destroyed annexed territories, increased expenses for health care or various forms of support for key industries. Such fiscal expansion will also contribute to overheating the economy and cause high inflation. The fact that the economy is overheating is clear to everyone in the country, and it is also clear to the central bank headed by Elvira Nabiullina, which is trying to significantly dampen the overheated economy.
In response to rising prices, the Russian central bank raised interest rates to 21%, while it is expected that they may reach up to 25% in December. Such high rates significantly limit consumption and credit-financed investments. Both businesses and households are facing challenging conditions as expensive loans put even more pressure on their budgets. To give you an idea, if we wanted to take out a 100,000 mortgage for 30 years at 25% interest, the monthly payment would be 2,080 euros and we would have to pay up to 750,000 euros in total.
On the other hand, however, Russia perceives such measures as necessary, as the threat of high inflation is obviously higher for them than the threat of high financing costs. However, it is paradoxical, since on the one hand the country strongly supports the economy due to the need to produce military goods and services, but on the other hand it has to be dampened by high interest rates. We cannot even imagine such high interest rates in our country.
Historical experience shows that war economies can survive for a certain time in difficult conditions, but there will inevitably come a turning point that will bring them down. For the Russian economy, that point may be closer than many realize. Labor shortages caused by mobilization, population fleeing the country, massive war spending at the expense of infrastructure investment, a weakening currency, high interest rates, continued sanctions, disrupted foreign trade and limited availability of goods all create pressures that leave deep scars on the Russian economy . These factors can set it back decades.
FOTO: skorchanov (pixabay.com)
Source: www.nextech.sk
