Russia’s Central Bank Can’t Stop Ruble Trouble

livemint.com:

Russia’s currency crisis might not follow the classic emerging-market template: Rather than a sharp depreciation stemmed by painful interest-rate rises, we are more likely to see a slow but inexorable decline. The Bank of Russia raised borrowing costs from 8.5% to 12% Tuesday in an attempt to stop a slide in the ruble. A day earlier, $1 briefly bought as much as 102 rubles, prompting rate setters to call an emergency meeting.

The exchange rate depreciated again Tuesday after the expectation of an interest-rate increase triggered only a fleeting recovery. Driving the moves is a narrowing in Russia’s large trade surplus. In June, exports measured in U.S.

dollars fell 38% from a year earlier, owing in part to the global fall in commodity prices. Meanwhile, imports rose 18% as a rebound in the Russian economy and loose fiscal policy led to higher domestic spending. Inflation jumped to 4.3% in July.

But the ruble hasn’t plumbed the depths it did after the invasion of Ukraine last year, despite the unprecedented magnitude of the economic warfare since leveled against Russia. This rekindles an old debate: Are sanctions against Russia actually working? The answer seems to be yes, but not exactly as intended. Severing Russia from the international monetary system and embargoing its central bank’s reserves were risky moves meant to disrupt the functioning of banks and bring about economic collapse.

That didn’t happen. Meanwhile, Western countries’ addiction to Russian gas stopped them from implementing a full export ban, allowing Moscow to keep collecting revenues and boost military spending. Trade has shifted to Asia, oil price caps have largely been evaded, and Russian banks have still accumulated foreign reserves.