The Russian ruble enjoyed a brief respite this week after Moscow’s central bank raised its key interest rate by 350 basis points to 12%, but the effect is unlikely to last, Reuters writes.

Russia’s official currency has depreciated by more than 20% since the start of the invasion of Ukraine in February 2022 and on Monday again broke through the psychological threshold of 100 rubles needed to buy one dollar.

The situation prompted rare criticism from the Kremlin of the central bank, led by technocrat Elvira Nabiullina, and a swift hike in the benchmark interest rate in response.

The ruble rose slightly after the decision was announced, but economists say the effect is likely to be temporary as the impact of sanctions, reduced oil production, higher import costs and an out-of-control budget deficit due to military spending all put pressure on Russia’s national currency. .

The topic is sensitive for the Russian authorities, especially as the country prepares for presidential elections in the spring of 2024.

Obviously, the most reliable way to stabilize the ruble would be to withdraw troops from Ukraine and end the war, but since that seems unlikely, the Central Bank and the government in Moscow still have several options to try to keep the ruble exchange rate below CONTROL:

Another increase in the base rate in Moscow

One of the options available to Elvira Nabiullinii is a further increase in the base interest rate.

Last year, it was raised to 20% immediately after the invasion began to calm markets and support the ruble before capital controls could be implemented.

But the higher borrowing costs caused by such a measure limit growth prospects and make life difficult for companies and, in this case, the government led by Prime Minister Mykhailo Mishustin, who must finance the needs of the “special military operation.”

The Ministry of Finance of Moscow has already stated that lower interest rates will reduce pressure on the budget and its financing needs.

Another problem is that further increases in the base interest rate are unlikely to do anything to stem capital flight, meaning that the depreciation of the ruble will only be slowed, not stopped.

Elvira Nabiullina at a report in the Kremlin (PHOTO: Mykhailo Klimentiev / Sputnik / Profimedia Images)

New capital control measures

Russian authorities are again considering forcing exporters to sell foreign currency earned from trades as part of a series of capital controls to shore up the ruble, multiple sources consulted by Reuters said on Wednesday.

One of the sources explained that 4 measures are currently being discussed:

• for exporters to return up to 80% of export proceeds to Russia within 90 days of delivery.

• termination of export subsidies for exporters who do not comply with this decision;

• banning the payment of dividends and the provision of loans abroad, including to countries that Russia considers “friendly”;

Last year, Vladimir Putin ordered in March that exporters convert 80% of their export earnings into rubles to support the country’s financial stability, leading to a sharp appreciation of the Russian national currency in the following months.

Reuters sources said capital controls could be imposed if the ruble does not show clearer signs of recovery by Friday.

Reduction of excess liquidity in the economy of Russia

Other options available to the Russian authorities may have too limited an impact, although some of them can be used in tandem.

The Central Bank of Moscow could try to reduce the surplus of cash rubles by increasing the required reserves that banks must keep at the Central Bank, thereby reducing the amount of money that could be exchanged for other currencies.

Promsvyazbank analysts note that the Central Bank of Russia has already demonstrated that it is not indifferent to the volatility of the ruble and that the prospect of further steps to stop the depreciation will at least temporarily weaken the demand for foreign currency.

The central bank has already announced that it will no longer hold one-year repo auctions, the repurchase agreements that help banks manage their liquidity needs. Russian banks now owe the Central Bank of Moscow 1.28 trillion rubles ($13.46 billion) as a result of these auctions.

One of the deputy heads of the Central Bank, Oleksiy Zabotkin, said that the decision to suspend repo auctions was not related to the weakening of the ruble and was a “pure coincidence”.

Near an ATM in Russia (PHOTO: RIA Novosti / Sputnik / Profimedia Images)

Interventions in the foreign exchange market

Another way to protect the ruble is to sell currency from the National Bank of Russia. After a several-month hiatus last year, Russia resumed foreign currency trading in January, selling Chinese yuan.

Moscow’s central bank tried to switch to currency purchases in August, but the plan was quickly scrapped and Russia effectively abandoned its own fiscal rule amid the ruble’s collapse.

But selling large amounts of currency could quickly deplete Moscow’s reserves as Western sanctions freeze roughly half of what it had before the war (more than $600 billion).

Last week, Zabotkin said that the Central Bank will take this step when it deems it necessary.

Increase in Russian oil exports

Analysts at Alfa Bank, Russia’s largest private bank, said in a report on Tuesday that the main structural cause of the ruble’s weakness is the decision by the government led by Mikhail Mishustin to join the OPEC+ group to cut oil production to keep prices up.

Moscow extended its oil output cuts through September, planning to cut exports by 300,000 barrels a day next month. Exports of Russian natural gas and oil have fallen sharply this year after the West and other countries imposed embargoes on Russian oil imported by sea and price caps on other purchases.

Other markets have opened up for Russia, mainly India and China, but Moscow is forced to sell at big discounts.

Any increase in oil production will weaken global prices. But that would mean the Russian government would breach its Opec commitments, as it seeks to maintain close ties with Saudi Arabia and depends on Iran for drone imports.

In addition to the diplomatic drag, Russia’s main problem in this regard is that the rise in oil prices is not enough to compensate for the lost sums from the reduction in production.

Putin near the buttons of Gazprom (PHOTO: Serhii Guneev / Sputnik / Profimedia)

Introduction of “creative taxes”

A more unorthodox (and controversial) option would be to introduce new taxes on currency transactions, a measure proposed on Tuesday by a member of the State Duma, the lower house of the Russian parliament.

Volodymyr Koshelev, an MP from the Liberal Democratic Party of Russia (which, despite its name, is an ultra-nationalist political party) proposed taxing foreign exchange transactions on the stock market and tightening the regulation of foreign currency earnings.

Interfax, one of Russia’s state news agencies, cited a source as saying that authorities were discussing a new tax on “excess profits” for exporters who refuse to cooperate in repatriating revenues to Russia.