When Russia launched its illegal war of territorial aggression against Ukraine in February of 2022, many observers thought western financial sanctions would quickly crash the Russian economy. When Russia was cut out of SWIFT, the Ruble plunged to below a penny against the dollar, but quickly recovered, at least a bit.
Due to various reasons (gas and oil sales, gold transfers, and the many loopholes EU countries have made for their sanctions), Russia’s economy hasn’t collapsed as quickly as many expected, or hoped.
But just today, the ruble finally slipped back below the penny-parity line again.
Russia’s central bank called an extraordinary meeting Tuesday after the ruble crashed through the level of 100 to the dollar for the first time since March of last year as Russia’s war in Ukraine drags on and international sanctions hit trade.
Policy makers will publish a statement on the key rate at 10:30 a.m. after the meeting, the Bank of Russia said in a statement, without giving any further details. The central bank hiked its key rate by a percentage point to 8.5% last month, the first increase since emergency measures imposed immediately after the invasion of Ukraine in February 2022.
The exchange rate has emerged as the barometer of health for an economy battered by shrinking export revenues and its isolation from international financial markets, bringing infighting between the government and central bank into the open.
The ruble reversed losses after the announcement, traded up 1.8% at 97.6625 at 7 p.m. in Moscow. The currency, which had broken through 101 earlier on Monday, has weakened about 27% this year for the third-worst performance in emerging markets. The central bank had sought to arrest the slump by saying it won’t purchase foreign currency on the domestic market for the rest of 2023.
Yeah, no one trusts Russia to hold adequate foreign currency reserves a year and a half into sanctions. So that move doesn’t help.
Lots of meaningless Russian “economy is great” blather snipped.
Revenues of Russian oil and gas exporters declined to $6.9 billion in July from $16.8 billion in the same period last year, according to the latest central bank data. An easing of restrictions on moving money abroad has also led to accelerated capital flight as Russians race to shift funds into foreign accounts.
“The weakening of the ruble is the result of the international screws tightening around the Russian economy, but also the cost of keeping the economy going,” said Erik Meyersson, chief emerging-market strategist at SEB AB in Stockholm. “Nobody wants to hold rubles, and the limited supply of foreign exchange from exporters weighs on the currency.”
Of course, Russia could get out of it’s self-imposed monkey trap by withdrawing its forces from all occupied Ukrainian territory. But I don’t think anyone is hold their breath for that to happen…
Tags: Economics, foreign currency, ruble, Russia, Russo-Ukrainian War, sanctions, Ukraine, Vladimir Putin
Just watched a YouTube video where a young Russian man and his family went to a Russian Wal-Mart showing what you could buy with 1 US dollar versus 100 rubles. Channel is The Sheekoz Family. https://youtu.be/Krol-dRN8oU
They’re good people, wish he was my neighbor.
Russia is still still running a current account surplus, amounting to 1.55% of GDP throughout 2023H1, about $25.2 billion. This minimizes the effects of foreign sanctions on their underlying economy, even though sanctions can devalue the notional value of the Russian Ruble.
The 2023Q1 U.S. current account deficit was 3.3% of gross domestic product, about $ 219.3 billion. Double those numbers to make a valid comparison with Russia’s numbers, above.
Whose economy is going to go bust?
“ Russia is still still running a current account surplus, amounting to 1.55% of GDP…”
If the function of money (in this case foreign reserves) is to facilitate exchange, how does Russia’s current account surplus work to its advantage when facing heavy sanctions? They cannot readily purchase urgently needed goods to include microchips for advanced electronics and precision-made ball bearings for maintenance of the railroad industry, upon which their war logistics is helplessly dependent. Hell, they can’t even procure state-of-the-art industrial machinery!
Kruschev: We will bury you. Reagan: We win; they lose.
Tell me again, “Whose economy is going to go bust”?
PS: When Putin heard the ruble fell below the one penny mark against the dollar he sh*t a BRIC. 😆
There’s a lot of balls in the air right now and no one is watching out for middle class Americans.
There are so many smugglers and middlemen for strategic commodities like chips … our southern border is more secure.
REAL big picture, Xi and Vlad are working on kicking the support out from under the US economy and I expect the usual suspects will be using that to complete their police state dreams for us little folks.
https://nexttobagend.blogspot.com/
The Chinese economy is faltering. Property Investment YoY stands at -8.5% vs -7.9%. Real estate holdings represent the lion’s share of Chinese wealth. The PBOC was alarmed by this trend and today cut near-term rates to 2.5%.
This will accelerate capital flight but they have few options. When your citizens are living inside concrete pipes, some means must be found to increase personal consumption.
Historically low interest rates have led to over investment in capital goods and the time has come for a reckoning. Do you prop up capital investment or pull
from savings (foreign reserves) to ameliorate the suffering of your people?
China will be poorer for having misallocated spending on empty cities and malls. Already, Japan shows signs of picking up the slack from a Chinese downturn. Vlad and Xi’s aspiration of dethroning the hegemon will have to wait.
If the Russians could not “readily purchase urgently needed goods”, their current account surplus would have risen by the amount of failed purchase attempts. This did happen immediately after February 24, 2022; but Russian economic actors found ways around Western sanctions and asset seizures by August. Hence the increase in USD/RUB since August.
The Russian economy is now experiencing inflationary pressures similar in scale to those affecting the U.S. economy. The Russian inflation seems to be primarily driven by labor scarcity, while the inflation America is experiencing is due to multiple factors driven by government spending. These inflations are the exact opposite of the deflationary pressures affecting the Chinese economy.
You are right about the current account surplus being drawn down from its recent level approximating 10% of GDP. The Russians are purchasing foreign goods because they cannot produce enough of their own.
That said, “urgently needed goods” refers to war supplies, not consumer goods. There are comparatively few paved roads in Russia. Rolling stock is fundamental to the distribution of goods and critical to the supply of war materials.
If you recall the recent release of toxic fumes in East Palestine, the train that derailed had a bad bearing that caught fire. Russia lacks the ability to replace wheel bearings because their supplies are sanctioned and no domestic replacements are available. If your war supplies travel primarily by train and your rolling stock requires periodic maintenance to include replacement of critical components, you will suffer loss.
Both war materials and consumer goods will be affected. Absent a robust economy, Russia’s war-making capabilities will be crippled and their citizenry will face the necessity of tightening their belts and reducing their consumption.
Russia has a huge overcapacity in railroad rolling stock production. This overcapacity almost bankrupted Uralvagonzavod in 2016 and resulted in their absorption by Rostec. UVZ is also Russia’s top AFV producer and they shifted their production manpower to tanks in 2016. That manpower can revert to rolling stock production at any time, but the Russians also have yards and yards full of surplus rolling stock all over the country. The Rusians never throw anything away. Storage – especially bad storage – is cheap in a country of their size.
Rostec also administers a huge military industrial complex in the vicinity of Perm which has demonstrated that it is capable of out producing all of NATO in many critical items, notably artillery guns and shells.
When the Cold War ended, the Russians mothballed their production equipment, rather than selling it to the Chinese as NATO countries did. So about half of the Russian’s September conscription of 300,000 men went to Perm to boost military production. NATO has yet to be able to increase production significantly because our military industrial complex is wating on equipment like 3,000 ton hydraulic presses with three year lead time.
The diversion of Russian workers to their military industrial complex is why the Russian economy is experiencing labor driven inflation. Their next levée of 500,000 men will increase Russian inflation, but such inflation is unlikely to deter the Russian government.
“[T]he Russians also have yards and yards full of surplus rolling stock all over the country. The Rusians never throw anything away.”
The Russians similarly mothballed tanks and military transport vehicles. When attrition caused this hardware to be drawn upon, it was discovered that the truck tires had radial cracking which caused them to fail repeatedly. Similarly, tanks suffered from poor maintenance. Parts were cannibalized to create a replacement fleet but it too had numerous breakdowns.
Clearly, the best maintained rolling stock was put into service in preference to marginal equipment. As such, marginal replacement parts that are well into the end of their service life (even if they have been stored properly, which is unlikely) cannot adequately substitute for new wheel bearings.
I find it ironic, if not disingenuous, that you declared well-maintained surplus Australian fighter jets were unsuitable for Ukraine’s service needs but Russian scrap is entirely adequate for the successful prosecution of Russia’s invasion.
“Rostec also administers a huge military industrial complex in the vicinity of Perm which has demonstrated that it is capable of out producing all of NATO in many critical items, notably artillery guns and shells.”
In October 2021, seventeen “ammunition engineers” blew themselves up handling explosives.
“This is an egregious case, and everything possible must be done so that nothing like this will happen again. Both in hazardous industries and in those that are lower in hazard class, but can pose a threat to the life and health of people,” he said. [Regional Governor] Lubimov said he would recommend that authorities carry out unscheduled inspections at such facilities.”
Six days ago, a Moscow “pyrotechnics plant” detonated, causing numerous injuries. Artillery shell production and handling is a hazardous business in Russia these days! Try as they may, Russian authorities cannot mitigate the risk because the process is inherently dangerous and conscripting poorly-trained labor to back-fill depleted stocks is a radically expanded example of the hoary tradition of Russian roulette.
“I find it ironic, if not disingenuous, that you declared well-maintained surplus Australian fighter jets were unsuitable for Ukraine’s service needs but Russian scrap is entirely adequate for the successful prosecution of Russia’s invasion.”
Aircraft are constructed from high strength aluminum alloys which are susceptible to SCC, corrosion fatigue, and other forms of premature metallurgical cracking/failure. Aluminum alloys typically have only 20% of the fatigue life of the prosaic steel grades used in railroad rolling stock construction, even when they are kept far from corrosive salt spray/air. Aircraft are also designed to higher stress levels to reduce weight. Railroad rolling stock design is much more conservative.
Even well maintained aircraft assembled by riveting aluminum panels to ribs have a remarkably short lifespan in demanding military service. Usually only a few thousand hours. Railroad rolling stock, properly maintained, live on seemingly forever. The average age of American freight rolling stock is about 20 years. This means half of the American rolling stock is over 20 years old. Other countries run much older rolling stock without issues.
If surplus rolling stock were adequate to fulfill replacement needs, the Russian Trade Ministry would not find it necessary to prioritize “import substitutions”. I strongly suspect that “import substitutions” is Kremlin-talk for ersatz, to include horse and buggy or disfunctional and unreliable cheap Chinese crap.
“ MOSCOW. April 11 (Interfax) – Russian enterprises are expected to be able to achieve full import substitution for parts for railroad rolling stock manufacturing in two years.
“Relevant issues were discussed during a meeting between Russian Industry and Trade Minister Denis Manturov and the heads of the largest railroad rolling stock manufacturing enterprises, the press service for the Industry and Trade Ministry said.
“The parties noted during the meeting that the sector’s priority task is to increase the pace of import substitution, including for key parts for locomotives, electric trains, and maintenance vehicles.”
[…] oil & gas revenues are down and the ruble is struggling on international currency markets. The Russian war industry is unable to keep up with losses on the […]
I am so old I can remember my economics professors declaiming the utility of international trade to leverage competitive advantage.
Competitive advantage is now history and the entire world will be poorer for it.
The Russians are scrambling to replace embargoed items from NATO countries and we are scrambling to replace nickel, titanium, germanium, scandium, chromium, palladium, gallium, niobium, and a variety of fertilizers from Russia.
Think what Russia supplies us is far more critical than parts their railway rolling stock producers need. They can make everything on a locomotive or wagon. We cannot conjure palladium or titanium out of thin air.
“Even well maintained aircraft assembled by riveting aluminum panels to ribs have a remarkably short lifespan in demanding military service.”
The Australian FA-18s never saw “demanding military service”, which you well know.
From The Daily Mail on 30 April 2023:
….”Australian Strategic Policy Institute analyst Malcom Davis said he had ‘no idea’ why the planes had been so unceremoniously dumped.
‘They are in pretty poor condition because they have been stored outside so they are essentially rusting,’ he said.
Suggestions have been made the planes should be given to Ukraine to help fight off the Russian invasion but Dr Davis said they were outdated.
Australia has dumped its retired fleet of F/A-18A/B Hornets on a US airforce base in the remote Pacific island of Guam
‘They are very old, they are not the capable in terms of modern air combat in terms of having all the modern systems on board so that’s why we got rid of them and replaced them with the Joint Strike Fighters,’ Dr Davis said.
‘It’s not really what the Ukrainians are asking of us. The Ukrainians are asking for Bushmasters and Hawkei armoured fighting vehicles, that sort of thing. They are not asking for combat aircraft.
‘We got rid of them (the planes) because we replaced them with much more capable aircraft, they are early 80s technology.’
It was reported in 2020 that the retired Hornets had been sold to US entrepreneur Don Kirlin, whose company Air USA was going to contract them as ‘opposition’ planes for the American military to use in training exercises.
The sale, which was for an undisclosed amount, appears not to have been followed through….”
Not only does Canada continue to fly this aircraft, they recently bought 18 more F/A 18s from Australia to bolster their fleet in addition to seven non-flying models to use for parts.
“I am so old I can remember my economics professors declaiming the utility of international trade to leverage competitive advantage.“
You’re so old you mistook competitive advantage (sic) for COMPARATIVE advantage. Tell the truth, you studied at Bucknell, didn’t you?
Competitive advantage is a broader concept than comparative advantage. It encompasses both comparative advantage and differential advantage. It specifically addresses the positioning of companies in the economy.
From Investopedia:
> Competitive advantage is what makes an entity’s products or services more desirable to customers than that of any other rival.
> Competitive advantages can be broken down into comparative advantages and differential advantages.
> Comparative advantage is a company’s ability to produce something more efficiently than a rival, which leads to greater profit margins
>A differential advantage is when a company’s products are seen as both unique and of higher quality, relative to those of a competitor.
Think the Russian rolling stock manufacturers started incorporating foreign parts to achieve differential advantage, as much as comparative advantage. But autarky is now the order of the day.
“Not only does Canada continue to fly this aircraft, they recently bought 18 more F/A 18s from Australia to bolster their fleet in addition to seven non-flying models to use for parts.”
The Canadian Hornet buy from Australia was, in total, 18 flyable aircraft and 7 salvage cases as parts donors. A total of 25 airframes. Two of which were flyable. All of the 18 flyable Hornets are still undergoing restoration at RCAF Cold Lake, two years after their arrival.
This RAAF to RCAF transfer was originally vetoed by the Trump Commerce Department at the behest of Boeing in 2018 over what were said to be unfair Canadian Government subsidies of Bombardier’s C Series airliner. It was then approved by the Biden Commerce Department, giving the perception that 36 RAAF Hornets were ordered. Only 18+7 were transferred.