Russia’s invasion of Ukraine has caused a significant impact on several global economies. Wars and political instability are possibly the most major factors in altering a country’s economic standing, as there is sudden change and uncertainty, occurring all at once.
This has been made evident in the way Russia has responded to their economic situation following the invasion. Due to several factors decreasing the value of the Russian Rouble (RUB), Russia has drastically increased their interest rate, in hopes to manage their current economic climate.
Read on to find out more about the cause of movement in Russia’s currency, why they then increased their interest rates, and what they are hoping to achieve by doing so.
Why has the Rouble plummeted?
The invasion of Ukraine has impacted various countries across the globe, particularly those in the West. As a result, many countries have placed sanctions on Russia, in a response to condemn and discourage the invasion.
These sanctions led to the value of the RUB decreasing by 30% against the US Dollar (USD) on 28th February 2022 – a record low. This was due to:
- Export restrictions – The UK, US, and the majority of Europe have placed a ban on exports coming from Russia, via air and sea. With Russia supplying 40% of Europe’s natural gas imports, these sanctions prevent the large sum of income that Russia receives from these trades. With less income from trading raw materials and commodities, Russia’s currency value dropped heavily.
- Expelling from Swift – Russia has been banned from Swift, the main global payment system used for foreign money transfers. This has greatly restricted foreign investments into Russia, and virtually cut them off from foreign income. Also, despite having $630 billion in reserves, Russia cannot access the majority of this money since it’s in Dollars, and the West is preventing Russia’s central bank from gaining access to this cash. This has also been a huge contribution towards the RUB’s plummet.
With the RUB valued at a record low against the USD, and the majority of the globe restricting trade relations, Russia was in a very tight financial position, and therefore, had to act accordingly.
What was Russia’s response?
Russia took drastic action in response to the RUB’s massive decrease in value. The main reaction was on the same day as RUB’s record drop (February 28th), as Russia’s central bank hiked its interest rate more than double, from 9.5% to 20%.
This rise in interest rate was strategically actioned to mitigate the impacts of the western sanctions, and protect the value of the RUB from completely diminishing.
What is this set to achieve?
Russia implemented the interest hike to tackle the potential of hyperinflation. With the RUB’s value at a record low, and foreign trades and investments restricted for the future, a rise in interest rate might be Russia’s safety net to avoid collapse.
Russian citizens, and businesses, are in desperate need of liquidity. Many social media videos have revealed conditions in Russia, showing enormous queues for ATM machines, as people are trying to get cash quickly. The war has caused disruptions to businesses and unemployment on both sides, and this is paired with the severe sanctions that Russia is facing.
By increasing the interest rate, this may allow for citizens and businesses of Russia to find a more stable balance in the current economic climate. For instance, the higher interest rate may increase the deposit rate of various accounts and savings across Russia.
This added interest will allow people more funds to buy goods and live, in a time where commodities might start decreasing. Also, this will help funnel more cash back through businesses and into the country’s economy. For investors in Russia, as foreign investment is restricted, this means more funds in their accounts to invest back into the economy.
With these potential outcomes, the interest hike in Russia could begin to start increasing the value of the RUB, and take Russia out of a detrimental state of possible collapse, into a position of promising economic recovery.
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With this current economic change going on, it is essential for all traders to know what is forex and how does it work. With an in-depth understanding of political events affecting economies, you can more accurately begin strategising new avenues for profit.