Russian Ruble Nosedives as Economy Gives Putin Major Headache

The plunging Russian currency, the ruble, has added to inflationary pressures in Russia, British officials have said, as the country faces further economic turbulence exacerbated by the ending of its natural gas transit deal with Ukraine.

As of Friday, one U.S. dollar was worth 110 rubles, weeks after hitting in November a war-time low of 114 which the U.K. Defense Ministry said on Friday was "almost certainly" caused by the latest tranche of U.S. Treasury sanctions.

It comes as Russia expanded a digital ruble scheme which could mitigate the impact of sanctions and ease trade. Newsweek has contacted the Russian finance ministry for comment by email.

Russian five ruble coins bearing the State Emblem and inscription "Bank of Russia" are pictured in Moscow on December 20, 2024. The Russian currency has faced a turbulent few months due to sanctions. ALEXANDER NEMENOV/Getty Images

Why It Matters

Vladimir Putin has earmarked 40 percent of the Russian budget on the military but his continued funding of the war has faced setbacks of Western-led sanctions, dwindling natural gas revenues and inflation stoked by worker shortages.

What To Know

The Russian ruble was 110 to the U.S. dollar on Friday, and while this is not the lowest level it has reached in recent weeks, having hit 114 on November 26, the U.K. MOD said that drop was the latest symptom of a "continued overheating of the Russian economy."

Flows of foreign currency into Russia face problems with exporter revenues limited by oil prices and sanctions. Also, the growing cost of cross-border transactions are pushing up the price of imports adding to downward pressure on the ruble.

Russia's Central Bank (CBR) said it would pause the purchase of foreign currencies and the ruble remained above 100 to the greenback until December 20.

Against expectations, the CBR did not raise the key interest rate further from an already record 21 percent but the U.K. MOD said that decision "will likely add to the imbalances in the economy" due to the inflationary impact of the depreciating ruble, labor shortages and high government spending.

"Criticism of high interest rates is growing amongst Russian businesses," the assessment said. "However inflationary pressures are also likely intensifying, in part due to the recent depreciation of the ruble."

With natural gas exports already hit hard by sanctions, the main bank involved in the trade of the energy resource, Gazprombank, was among 50 Russian financial institutions sanctions by the U.S. in November causing a further plunge in the ruble.

Russia's Digital Ruble

Meanwhile, Gazprombank was among 12 financial institutions that were in the pilot program for the digital currency launched in August 2023.

This scheme has been expanded to include Sberbank, Russia's largest financial institution, and Tinkoff Bank, known as Tbank as well as Tochka Bank, which offers digital banking services for small- to medium-sized businesses.

"The primary goal of the digital ruble pilot is to streamline and regulate domestic payments among Russian residents," Pavel Bazhanov, a Russian lawyer who provides legal support for Russian businesses in China and the wider region, told Newsweek.

"In theory, the digital ruble could eventually be used in transactions with neighboring countries, provided that counterparties accept this payment method. In practice, however, numerous challenges persist, including forex control regulations, both in Russia and other countries," such as China.

"Foreign businesses are not yet prepared to adopt the digital ruble or Russian digital financial assets (DFAs)," he added.

The main channel for payments is still traditional bank payments via non-sanctioned banks and payment agents while some transactions can be made with payments in stablecoins for example, USDT. "In the near future, it is more likely that the use of cryptocurrencies for payments will grow faster than the adoption of the digital ruble," he added.

What People Are Saying

British Ministry of Defense said: "Criticism of high interest rates is growing amongst Russian businesses. Inflationary pressures are also likely intensifying, in part due to the recent depreciation of the ruble."

Independent Russian outlet The Bell said on November 30: "There are few other options available to the authorities, and the ruble will almost certainly see more volatility."

Pavel Bazhanov, a Russian lawyer, told Newsweek: "Foreign businesses are not yet prepared to adopt the digital ruble or Russian digital financial assets (DFAs)."

What Happens Next

The depreciating Russian ruble comes at a tricky time for the country whose gas giant Gazprom faces a loss of revenues of around $5 billion a year after Ukraine refused to extend a natural gas transit deal that expired on December 31.

Just after the ruble hit its low of 114 against the greenback, a drop of 11 percent over the year, independent Russian financial news outlet The Bell said on November 30 "there are few good options to stabilize the currency market."

Russian authorities could draw from the National Welfare Fund but "the ruble will almost certainly see more volatility" and further "sudden fluctuations are inevitable."