Russia’s rouble hit a two-year low against the dollar on 26 November following new US sanctions against Gazprombank, says Reuters. The bank handles the last remaining European energy transactions with Russia, so the sanctions will cut into Russian gas revenue. The rouble dropped through the 100-to-the-dollar mark for the first time in over a year. The currency lost 11% against the dollar and 7% against the euro this year.
The central bank has raised interest rates from 9.5% before the war to 21% now. Even that eye-watering level is barely containing inflation of 8.5%. High interest rates are hurting stocks, with the local MOEX index down 20% this year. Foreign investors have been frozen out of their Russian holdings since the country’s 2022 invasion of Ukraine.
What does the rouble collapse mean for Russia's economy?
“Relentless” Kremlin war spending is causing Russia’s $2 trillion economy to overheat, says Jason Corcoran in The Moscow Times. High interest rates are stressing the property sector, with “over 200 shopping malls” at risk of bankruptcy because of soaring debt costs. Butter prices are up almost 30% this year, turning a “simple staple” into “a luxury” and prompting a spate of butter thefts.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Defence and “national security” spending now accounts for 40% of the Russian federal budget, says Tim Lister for CNN. Non-defence businesses are struggling to find enough workers, driving a wage-price spiral. Still, a “steady stream of commodity revenues” and “escalating repression at home” means the Kremlin “can continue funding its war effort for the foreseeable future”, says Alexandra Prokopenko of the Carnegie Russia Eurasia Center.
The Russian economy is likely to be heading for “stagflation”, says Filip De Mott in Business Insider. But analysts at the Center for Analysis and Strategies in Europe think the Kremlin can hold off a more “serious crisis” for at least “three-to-five” more years. They argue that Moscow can bring in new immigrant workers from central Asia to stem labour shortages, while there is still scope to raise taxes on individuals and companies to buttress government spending.
A country that agrees to trade advanced military technology in exchange for North Korean soldiers is evidently running into major “resource constraints”, says Martin Sandbu in the Financial Times. Ultimately war economies must transfer resources from the private sector to the military.
High interest rates have that effect. Russia’s 21% rates are starving “long-term corporate investment”, diverting resources to immediate defence production instead. Russian industrialists are already complaining. Even Sergei Chemezov, the boss of state-controlled weapons business Rostec, has “publicly warned” that “if we continue to work like this, most companies will go bankrupt”.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
Are Premium Bonds worth it? Two-thirds of holders have never won a prizeMore than 14 million Premium Bonds holders have never won despite increases in the number of prizes worth £50 and £100
-
Why did Labour take over British Steel – was it a good idea?The government has stepped in to take control, not ownership, of British Steel, citing national security and other factors. But does that make sense?
-
'Rachel Reeves' plan to force pension funds into UK assets won't work'Opinion Hustling pension fund cash into British assets sounds like a good idea. It would be better to make Britain an attractive place to invest, says Matthew Lynn
-
Supersonic travel: How China could 'leapfrog' US and Europe's commercial aviation industryOpinion Innovation in commercial aviation has been stuck for 60 years. A commercial supersonic jet might be back on the market soon, but will China get there first?
-
How British businesses can tackle Trump's tariffsThe majority of British businesses are likely to take a hit from the chaos caused by Trump’s tariffs to reorder global trade. Companies in the firing line face some difficult decisions, says David Prosser
-
Trump wants to colonise Mars – will it happen?Donald Trump wants to plant the US flag on Mars. Could humans really live there?
-
Why are energy bills so expensive in the UK?Electricity bills in the UK are higher than in any comparable rich country. Some blame the net-zero zealotry of the government for that. What is really to blame for high energy bills?
-
Will Putin invade Europe? Why investors know Russia is a paper tigerOpinion Markets are right to ignore talk of Putin invading Europe, says Max King.
-
Why French far-right leader Marine Le Pen has been banned from running for officeMarine Le Pen, presidential candidate and leader of France's right-wing National Rally party, has been barred from standing by the country's judges.
-
Five years on: what did Covid cost us?We’re still counting the costs of the global coronavirus pandemic – and governments’ responses. What did we learn?
