The Ruble Has Collapsed. Here’s What It Means for Russia.

“Economy and life in Russia will never be the same again,” a Russia historian said.

Russia’s currency collapsed after Western leaders announced unprecedented sanctions aimed at crippling Moscow, signaling an imminent crisis that experts say will deepen Russia’s isolation and fuel social discontent.

The Russian ruble has lost some 20 percent of its value against the U.S. dollar since Thursday, when Russian President Vladimir Putin launched an invasion of Ukraine. This means anyone holding the currency can now buy less with their money.

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Over the weekend, Western countries announced a set of new sanctions to punish Russia for its unprovoked invasion of the sovereign nation, including banning some Russian banks from the SWIFT payments system and restricting the Russian central bank from using its $640 billion of foreign exchange and gold reserves to prop up the ruble.

The measures, deemed unprecedented by many experts, are expected to deal a strong blow to the Russian economy. Anxious Russians waited in long lines outside ATMs on Sunday, worried the country would run out of cash.

“Economy and life in Russia will never be the same again,” said Alexander Titov, a Russia historian with Queen’s University Belfast.

Potential economic slowdown and Russia’s further isolation from the rest of the world could lead to growing discontent toward the leadership of Putin, who might resort to suppressive policies to protect his rule, he said.

“With drastically falling living standards, faltering economy, and dissent among elites, more political crackdown and suppression seems likely.”

Although details have yet to be released, the new sanctions have already led to predictions of prolonged economic and political turmoil in Russia. 

Sergey Aleksashenko, a former deputy chairman of the Russian central bank who now lives in the U.S., said the sanctions could cause inflation in Russia in the short term and slow growth in the long run.

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Steven Hamilton, an economist with George Washington University, called the escalation in sanctions “unprecedented.”

“This is going to generate a kind of currency crisis, financial crisis, and an economic crisis in Russia, and the sanctions make it very difficult for the Bank of Russia to do a lot of things that it would normally do to try and control that situation.”

Hamilton said the ruble collapse will likely prompt the central bank to inject more liquidity into the market and cause further inflation. Businesses will struggle to borrow money from overseas or repay debts, slashing investment interests in Russia. 

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While China, Russia’s biggest trading partner, has refused to join the sanctions, the country would unlikely go out of its way to help Moscow, because of the great financial risks associated with the Russian economy, analysts say. 

Russia’s energy exports will continue serving as a major lifeline for the country. Western countries have exempted energy sector payments from the sanctions targeting Russian banks, since many European countries rely on natural gas and oil from Russia. 

Aleksashenko, the former central banker, said the sanctions were not yet “nuclear.” The high oil price at the moment will allow the country to receive significant payments in euros and import consumer goods, thus avoiding catastrophic scenarios, such as food shortage. 

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However, the inflation would still undermine people’s living standard. Russia’s economic elites would also feel the pain from travel restrictions, caused by tit-for-tat flight bans between Russia and the European Union, and the stock market chaos, he said. 

On Monday, the Russian central bank more than doubled interest rates to 20 percent, banned foreigners from selling Russian securities and ordered exporters to convert their revenues to the ruble. The Moscow stock exchange was suspended on Monday and would stay closed on Tuesday. 

Putin, however, has so far shown no signs of giving in. On Sunday, he called the West’s sanctions “illegitimate” and ordered Russia’s nuclear arsenal to be put on high alert. On Monday, Ukrainian officials said civilians were killed in Russian rocket strikes on residential districts of Kharkiv, the country's second largest city, while more than 70 Ukrainian troops were killed when Russian troops shelled a military base in the town of Okhtyrka.

Satellite images taken on Monday showed a Russian military convoy north of Kyiv that stretches for about 40 miles, compared with the 17 miles reported earlier in the day. 

Follow Viola Zhou on Twitter.

Tagged:

Ukraine, Putin, ukraine invasion, worldnews, world conflict

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