Russia’s central bank on Tuesday raised its key interest rate by 3.5 percentage points to 12%, the highest level since March 2022, in an attempt to curb inflation and stabilize the ruble, which has been battered by the ongoing war in Ukraine and Western sanctions.
The decision was announced after an emergency meeting of the bank’s board of directors, which was called a day earlier as the ruble plunged below 100 to the U.S. dollar for the first time since the early weeks of the war. The ruble recovered some ground after the rate hike, trading at around 95 to the dollar on Tuesday afternoon, but it remains down more than 20% this year, making it one of the worst-performing currencies in the world.
The central bank said in a statement that the rate increase was aimed at limiting price stability risks, as the ruble’s depreciation was fueling inflation and raising inflation expectations. The bank also said that it would consider further monetary policy tightening if necessary.
Ruble Slide Reflects Economic Imbalance
The ruble’s slide reflects the growing imbalance in the Russian economy, which is facing multiple challenges from the war, sanctions, and a labor shortage. The war has increased defense spending and disrupted trade flows, while sanctions have reduced oil and gas revenues and restricted access to foreign financing. The labor shortage has resulted from a decline in immigration and an increase in casualties among young men.
As a result, Russia is importing more and exporting less, leading to a smaller trade surplus, which typically supports the currency. At the same time, domestic demand for imports has risen, as consumers seek to hedge against inflation and currency depreciation. This has created excess demand for foreign currency, putting further pressure on the ruble.
The central bank said that it expected inflation to peak at around 7% in October, well above its 4% target, before gradually declining to 5.5-6% by the end of 2023. It also said that it expected economic growth to slow down to 2.5-3% this year, from 4.1% in 2022.
Kremlin Aide Blames Central Bank for Weak Ruble
The central bank’s move came after President Vladimir Putin’s economic adviser, Maksim Oreshkin, blamed the weak ruble on “loose monetary policy” in an op-ed published on Monday. He argued that the central bank had allowed excessive credit growth, which had flooded the economy with money and stimulated inflation. He also called for a “strong ruble” policy to help Russia adjust to the new economic reality.
Oreshkin’s criticism was seen as a rare sign of public disagreement within the Kremlin over economic policy. Some analysts suggested that it reflected a power struggle between different factions or a scapegoating strategy to deflect blame from Putin.
The central bank, led by Governor Elvira Nabiullina, has generally been praised by Western economists for its independence and professionalism. It has also been credited with stabilizing the ruble after its record low of 150 to the dollar in March 2022, when it imposed strict capital controls and raised interest rates to 20%.
Outlook Remains Uncertain Amid War and Sanctions
Despite the central bank’s intervention, the outlook for the ruble and the Russian economy remains uncertain amid the ongoing war and sanctions. The war has shown no signs of abating, as Russia continues to support separatist forces in eastern Ukraine and faces resistance from Ukrainian troops and NATO allies. The sanctions have also been tightened and extended by the U.S. and the EU, targeting key sectors such as energy, finance, and technology.
Some analysts have warned that Russia could face a deeper recession or a debt crisis if oil prices fall further or if sanctions are escalated. Others have argued that Russia has enough reserves and fiscal space to withstand external shocks and that it could benefit from diversifying its economy and strengthening its domestic market.