Inside Russia’s Hidden Economic Crisis: Inflation, Oil Export Bans, and the Faltering Ruble
Russia is facing a serious economic crisis that has been largely overshadowed by its ongoing war with Ukraine. The country is struggling with high inflation, a weak currency, and a ban on oil exports that has reduced its revenues and increased its isolation. In this blog post, I will examine the causes and consequences of these problems, and how they affect Russia’s ability to sustain its military aggression.
The oil ban: a self-inflicted wound
One of the most dramatic measures that Russia has taken to cope with its economic woes is a temporary ban on exports of petrol and diesel to all countries outside a circle of four ex-Soviet states: Belarus, Kazakhstan, Armenia, and Kyrgyzstan. The ban came into effect on September 21, 2023, and was supposed to last until November 30, 2023, but was later extended until December 31, 2023.
The ban was motivated by several factors. First, Russia faced a shortage of fuel in its domestic market, especially in the southern regions, where the harvest season was underway. The shortage was caused by a combination of factors, including maintenance at oil refineries, bottlenecks on railways, and the weakness of the ruble, which made exports more profitable than domestic sales. Second, Russia wanted to stabilize the fuel prices in its domestic market, which had spiked due to the shortage and the high inflation. Retail prices were capped by the government to curb inflation, but this created a gap between wholesale and retail prices, and encouraged unauthorised “grey” exports of fuel. Third, Russia wanted to reduce its dependence on foreign markets, especially Europe, which had imposed an embargo on seaborne imports of Russian crude oil and refined products in response to Russia’s invasion of Ukraine. The embargo was part of a broader sanctions regime that also included price caps on Russian oil, maritime service bans, and asset freezes.
The oil ban, however, has had negative consequences for Russia’s economy. First, it has reduced Russia’s oil revenues, which account for about 40% of its budget and 60% of its exports3. According to the Russian energy ministry, the ban has cost Russia about $4 billion in lost export revenues. Second, it has increased Russia’s isolation from the global oil market, and made it more vulnerable to price fluctuations and supply disruptions. Russia has redirected some of its oil exports to Asian countries, such as China and India, but these markets are not as lucrative or stable as Europe. Third, it has damaged Russia’s reputation as a reliable oil supplier, and undermined its long-term contracts and partnerships with foreign customers. Some of Russia’s oil buyers have sued the country for breach of contract, and others have sought alternative sources of supply.
The ruble: a victim of inflation and sanctions
Another major challenge that Russia faces is the depreciation of its currency, the ruble. The ruble has lost about 30% of its value against the US dollar since the start of the year, and reached a record low of 120 rubles per dollar on November 10, 2023. The ruble’s decline has been driven by several factors. First, inflation has eroded the purchasing power of the ruble, and reduced its attractiveness for investors and savers. Inflation in Russia has risen to 6.7% in October 2023, well above the central bank’s target of 4%. Inflation has been fueled by several factors, including the rising cost of food, fuel, and imported goods, the expansion of money supply, and the depreciation of the ruble itself, which creates a vicious cycle of higher prices and lower demand. Second, sanctions have restricted Russia’s access to foreign capital and technology, and increased its risk premium. Sanctions have made it harder for Russia to borrow from international markets, and forced it to rely on its own reserves and domestic sources of funding. Sanctions have also limited Russia’s ability to import advanced equipment and machinery, and hampered its development of new oil fields and infrastructure. Third, oil prices have been volatile and uncertain, and have not provided enough support for the ruble. Oil prices have fluctuated between $60 and $100 per barrel in the past year, and have been influenced by various factors, such as the global demand and supply, the OPEC+ production policy, the Covid-19 pandemic, and the geopolitical tensions. Oil prices have also been affected by the sanctions on Russia, which have reduced its oil exports and revenues, and increased its exposure to price shocks.
The ruble’s depreciation has had mixed effects on Russia’s economy. On the one hand, it has made Russia’s exports more competitive, and boosted its trade surplus. It has also increased the value of Russia’s foreign currency reserves, which stood at $620 billion as of November 2023, and provided a buffer against external shocks. On the other hand, it has increased the cost of imports, and worsened the balance of payments. It has also reduced the real income and consumption of the population, and increased the poverty and inequality. It has also raised the debt burden of the government and the corporate sector, which have a large share of foreign currency-denominated debt.
The inflation: a threat to stability and growth
The most pressing problem that Russia faces is the high and persistent inflation, which has eroded the living standards of the population, and undermined the credibility of the monetary policy. Inflation in Russia has been above the central bank’s target of 4% for most of the year, and reached 6.7% in October 2023, the highest level since 2016. Inflation has been driven by several factors, such as the rising cost of food, fuel, and imported goods, the expansion of money supply, and the depreciation of the ruble. Inflation has also been exacerbated by the Covid-19 pandemic, which has disrupted the supply chains and the production, and increased the uncertainty and the precautionary demand for money.
The high inflation has had negative consequences for Russia’s economy and society. First, it has reduced the real income and consumption of the population, and increased the poverty and inequality. According to the Russian statistics agency, the real disposable income of the population fell by 3.5% in the first nine months of 2023, and the poverty rate rose to 13.5% in the second quarter of 2023. Inflation has also eroded the purchasing power of the pensions and the social benefits, and increased the hardship of the vulnerable groups, such as the elderly and the low-income households. Second, it has increased the cost of production and investment, and lowered the profitability and competitiveness of the firms. Inflation has raised the interest rates and the borrowing costs, and discouraged the investment and the innovation. It has also increased the uncertainty and the risk, and reduced the confidence and the expectations of the producers and the consumers. Third, it has undermined the credibility and the effectiveness of the monetary policy, and increased the pressure on the central bank. Inflation has made it harder for the central bank to achieve its inflation target, and maintain its independence and autonomy. Inflation has also created a conflict between the monetary and the fiscal policy, and increased the demand for the central bank to finance the budget deficit and the public debt.
