Russia's ruble has tumbled: What does it mean for the wartime economy?

When the ruble fell below 100, however, the Kremlin and the central bank drew a line.

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 about the ruble:

WHY IS THE RUBLE FALLING?

Economic fundamentals play a role, though they aren’t the whole story. Russia is selling less abroad – mainly reflected in falling revenue from oil and natural gas – and it’s importing more. When goods are imported to Russia, people or companies have to sell rubles for foreign currency such as dollars or euros. That tends to lower the ruble’s exchange rate. Russia’s trade surplus – meaning it sells more goods to other countries than what it buys – has shrunk.

Trade surpluses typically support a country’s currency. Previously, Russia saw a large trade surplus because of high oil prices and plummeting imports after Russia invaded 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. "Significantly lower inflows of foreign currency due to the drop in exports are the key driver" of the ruble’s decline, according to the Kyiv School of Economics Institute. 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 defence spending, pumping money into companies that make weapons, for instance.

Companies must import parts and raw materials, while some of the government spending finds its way into the pockets of workers, especially because Russia is facing labour shortages. That government spending, along with the willingness of India and China to buy Russian 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.

WHY DID THE CENTRAL BANK RAISE INTEREST RATES?

To fight inflation, first of all. A weaker ruble worsens inflation by making imports more expensive in the 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, and the central bank’s goal is 4%. 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.

DO THIS MEAN SANCTIONS ARE WORKING?

Yes and no. Exports have fallen because Western allies have boycotted Russian oil and imposed a price cap on those exports to non-Western nations. The sanctions work by preventing insurers or shippers – mainly based in the West – from handling Russian oil above $60 a barrel. The cap and boycott instituted at the end of last year has 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. And Russia cut off most natural gas sales to Europe, its biggest customer. 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. However, higher oil prices have recently sent Moscow’s supplies above the price cap, the International Energy Agency said in an August report. The rebound in imports shows that Russia is finding ways around sanctions and boycotts. It’s more expensive and cumbersome, but if someone needs an iPhone or a Western-made car, they can get it. So the ruble’s fall was caused by sanctions, successful efforts to evade their impact and Russia’s war effort itself.

IS RUSSIA HAVING AN ECONOMIC CRISIS?

No, says Chris Weafer, CEO of Macro Advisory Partners. "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 in important ways. A lower exchange rate means more rubles for every dollar of earnings from oil and other products it sells. That bolsters government spending on the military and on social programs aimed at blunting the impact of sanctions on the Russian people. "What the central bank and the Finance Ministry have done over the last several months, is 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, which can advise major exporters when to exchange their dollar earnings into Russian currency. When the ruble fell below 100, however, the Kremlin and the central bank drew a line. "The weakness was planned, but it’s overdone and they want to pull it back," said Weafer, who foresees the ruble trading in the mid-90s in the coming months, roughly where the government wants it.

WHAT DOES THIS MEAN FOR EVERYDAY RUSSIANS?

Inflation caused by ruble devaluation hits poorer people harder than others because they spend more of their income on necessities such as food. Foreign travel – enjoyed mostly by a minority in prosperous big cities such as Moscow and St Petersburg – gets much more expensive with a weaker ruble. In any case, popular dissent is limited by government restrictions on criticising the war effort including jail time for those who speak out. "The instability of the national currency has always not very 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, 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.