Putin Addresses Ruble Drop Amid Economic Challenges
On Thursday, November 28, Russian President Vladimir Putin delivered reassurance to the public regarding the sudden and sharp decline of the ruble, asserting that "the situation is under control" and there is "no reason to panic." This statement came as the currency approached concerning lows of 115 rubles to the dollar and 120 rubles to the euro. Putin attributed the currency drop to several seasonal factors, including inflation, budget payments, and fluctuating global oil prices. Notably, the last significant decline occurred in March 2022, shortly after the Kremlin's military operation in Ukraine and the onset of Western sanctions against Moscow.
However, behind the president's assurances lies a complex set of realities that are undermining the Russian economy, which is currently grappling with inflation, overheating, and pervasive uncertainty. For Russia's war economy, where the military-industrial complex now serves as the primary driver of growth, the fall in the ruble may seem beneficial at first glance. It appears to enhance revenues from raw material exports, which are still chiefly conducted in dollars. These exports generate more petrorubles when dollars from sales are converted into rubles, thereby strengthening the federal budget.
This strengthening of the federal budget is critical for the government, especially as Parliament has just approved its 2025-2027 budget, featuring a 30% increase in defense and security spending. In 2025, Russia plans to allocate a record 135 trillion rubles (approximately $118 billion), amounting to 6.31% of its GDP. From the Kremlin's perspective, the ongoing conflict in Ukraine and against the West is seen as a long-term challenge that necessitates sustained financial commitment.
However, the West continues to impose new sanctions, further complicating the situation. The United States has recently targeted 50 Russian banks, including Gazprombank, a key financial institution that had been authorized to process payments for gas exports to Europe. This move signifies a reduction in foreign currency and capital inflows into Russia, which not only adds to the downfall of the ruble but also exacerbates concerns among economic stakeholders.
Despite Russia emerging as the world's most heavily sanctioned country and demonstrating resilience and adaptability over the past three years, it remains entangled in its longstanding structural handicaps. Sanctions that isolate Russia from Western markets are expected to gradually impact the economy.
While a weak ruble makes Russian exports, particularly oil, more affordable on international markets, it conversely inflates the cost of imported goods. Consequently, this trend of rising prices raises the risk of propelling the persistent inflationary spiral into an uncontrollable state. Official reports indicated an 8.5% increase in prices in October, which is more than double the Kremlin's target. Yet, many Russians perceive the actual inflation rate to be significantly higher, ranging between 10% and 20%.
The media has extensively covered the increasing costs of essential goods, such as butter and sunflower oil, following last year's surge in egg prices. Furthermore, appliance manufacturers have recently announced a forthcoming 10% price increase. These economic realities starkly contrast with the optimistic rhetoric from government authorities, creating a palpable disconnect between perceptions of inflation and official narratives.
As the ruble continues to decline, Russia's economic outlook remains uncertain, with various structural challenges looming on the horizon. The public's response to escalating prices may eventually lead them to scrutinize the government's reassurances more critically, opening the door for potential unrest if the economic pressures do not abate.
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