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.
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.
-
Inheritance tax pension reforms will delay payments to grieving families and the taxmanThe government is pressing ahead with plans to charge inheritance tax on pensions but there are warnings that it will be harder for executors to administer an estate and pay HMRC
-
More than a million pensioners set to be hit by tax on savings accountsA combination of higher interest rates and frozen tax thresholds is dragging more people into paying tax on their cash savings
-
Who is Rob Granieri, the mysterious billionaire leader of Jane Street?Profits at Jane Street have exploded, throwing billionaire Rob Granieri into the limelight. But it’s not just the firm’s success that is prompting scrutiny
-
Beware the bubble in bitcoin treasury companiesBitcoin treasury companies are no longer coining it. Short this one, says Matthew Partridge
-
Are venture-capital trusts worth investing in?Venture-capital trusts are a tax-efficient way to invest in early-stage companies. But are they worth the risk?
-
'It’s time to close the British steel industry'Opinion The price tag on British steel is just too high. It's time for Labour to make a grown-up decision and close down the industry, says Matthew Lynn
-
Last orders: can UK pubs be saved?Pubs in Britain are closing at the rate of one a day, continuing and accelerating a long-term downward trend. Why? And can anything be done to save them?
-
David Ellison: America's new media mogulDavid Ellison is building a mighty new force in old and new media. Critics worry that he will prove to be a Trumpian patsy. Is that fair?
-
How Next defied the odds and positioned itself as a British high-street stapleNext rose from a near-death experience and now thrives as a high-street staple. What's driving its success – and should you invest in the retailer?
-
Why investors should avoid market monomaniaOpinion Today’s overwhelming focus on US markets leaves investors guessing about opportunities and risks elsewhere
