.svg){kind=small}
Today, we will discuss the recent collapse of the Russian ruble. We will delve into the reasons for its collapse, its consequences for the Russian war effort, and several covert Russian efforts to temporarily mitigate the rising issues.
Firstly, the ruble was already not doing well due to high inflation levels, and the Russian central bank increased interest rates to ludicrous levels to try and compensate it, as explained in a previous strategic overview. However, to understand the recent rapid decline of the ruble, it is important first to understand what determines the value of a currency. The key factor in determining the ruble's value, compared to other currencies, like the dollar or euro, is its demand on the global markets. In other words, if international trade is conducted in rubles, the demand for rubles will rise because countries and businesses will need to buy rubles in order to trade with Russia, which then increases its value compared to other currencies.
Due to economic sanctions from the West, the demand and value of the Russian ruble had already significantly decreased as Western countries were no longer trading with Russia. The Russian government previously enacted policies to artificially raise the demand for the ruble, forcing Russian exports to be conducted for at least 50% in Russian rubles, and exporters to keep at least 60% of their earnings in Russia. Russian policy changes in the last months have lowered these requirements to at least 25% of exports to be conducted in rubles and for exporters to keep at least 40% of their earnings in Russia. In recent months, this has already caused Russian exporters to do more business in foreign currency, decreasing the international demand for the ruble and lowering its value.
However, the determining factor lies in the fact that the recent spike in inflation coincides with the new sanctions from the United States Foreign Treasury Department against the Russian Gazprombank. This bank, the third largest in Russia, manages the accounts of Russian gas conglomerate Gazprom. It’s important to note that the European Union still imports 17% of its gas supply from Russia, and the Gazprombank used to be the only mediator through which European countries could still buy rubles to buy Russian gas. Russia used the previously unsanctioned Gazprombank as a way to circumvent other Western sanctions, as well as using its more stable position to pay soldiers their wages, signing bonuses, and injury compensations, as well as their families in case they were killed.
While Russia can produce simple armaments independently, the Russian defense industry relies on imports of high-tech components, purchased with foreign currency, for more advanced weapon systems. Therefore the sharp decrease in the ruble's value directly impacts the amount of advanced weapon systems that Russia can produce, such as radars, targeting systems, high-tech aircraft components, and various communication equipment. A weaker ruble also increases the cost of supplying food, fuel, ammunition, and general logistics to frontline units, especially if these logistics partly depend on international imports. This is one of the reasons why Russia has recently sent North Korea over one million barrels of oil and an unspecified number of Air defense equipment, likely in exchange for North Korean soldiers to fight against Ukraine.
Lastly, a falling ruble makes financing payments and signing bonuses for new Russian recruits much more difficult. The Russian government is ever-increasing the signing bonuses for new recruits to continue coercing more Russian citizens to join the army, currently at 3 million rubles in some provinces, translating to over 28 thousand dollars at the time of writing. Still, the Russian government is trying to downplay the current problems, stating they have no issues with recruitment and do not need to conduct a new round of mobilization. While it may be true that Russians will not conduct a new round of mobilization, recent events do show that they have to rely on over 12 thousand North Korean soldiers to fill their ranks.
The Russian government is also doing all it can to get out of paying these soldiers their signing bonuses and medical compensation. The Russian Ministry of Defense recently submitted a law allowing the Russian government to recollect a soldier’s signing bonus if they committed a gross disciplinary offense or evaded military duties. Putin has also recently severely decreased the payments that Russian soldiers would receive after being wounded on the battlefield.
Overall, Russia is going down a downward economic spiral, as recent Russian policy changes indicate a loud concern about Russia’s long-term economic stability. The Russian economy suffers heavily under international sanctions, and Russia’s policy of recruitment through economic incentives seems unsustainable, such as the ever-increasing one-off signing bonuses. Russian economists warn that 2025 may be a crucial year for the Russian economy, as some have even predicted an economic collapse. However much can change, the Russian central bank will do anything it can to prolong disaster, as they have already temporarily halted all purchases of foreign currency on the Russian market till the end of the year, to prop up the Russian ruble. Still, the question remains: How much can be done with the Russian economy already in its current state?
.jpg)
Comments