Jul 7, 2023

• The Russian Ruble has nowhere to go but down amid the ongoing war in Ukraine, according to an economist.
• The Ruble is one of the worst performing currencies this year and fell to nearly 92 per US dollar on Friday.
• Capital flight, declining tax revenues, and a depleted central bank are factors hurting Russia’s currency. 

The Russian ruble is one of the worst performing currencies so far this year, falling about 24% to nearly 92 per US dollar, and the decline could get even worse. 

“The ruble doesn’t have anywhere to go but down,” University of Chicago economist Konstantin Sonin said in a tweet on Thursday.

The volatility in the ruble surged in recent weeks after the leader of the Wagner mercenary group, Yevgeny Prigozhin, staged a short-lived revolt against the Kremlin.

The ongoing uncertainty in Russia has sparked a surge in demand for other currencies, with Bloomberg estimating that $43.5 billion of retail deposits ditched the ruble in favor of other currencies since the war began in early 2022.

Sonin highlighted that while Russia’s ruble currency surged in 2022 due to “weird” macroeconomic effects, including a dramatic fall in imports, those effects are now over, and now the currency faces several headwinds that could push it to record low levels.  

“What remains is continuing capital flight, decreasing budget revenues, both oil/gas and domestic taxes, declining real incomes, CB [central bank] reserves lost because of the war,” Sonin said. 

The decline in oil prices has been an especially difficult challenge for Russia to navigate this year, as much of its country’s revenues are derived from the sale of the commodity.

Crude oil prices have dropped about 10% year-to-date, and the G7 imposed a $60 per barrel price cap on seaborne crude, dimming Russia’s chances of getting full market value for its oil sales. 

Russia’s revenues from the sale of oil slumped 50% in the first quarter of the year, leading the country to reporting a $42.5 billion budget deficit in the first four months of 2023. And the country’s war efforts aren’t helping its broader economy as it suffers from a brain drain of talent among its high-skilled work force. 

With Russia’s economy facing mounting headwinds amid its ongoing war effort against Ukraine, Sonin is expecting the ruble to continue its decline, though “not necessarily as fast as in the last couple of months.”

https://markets.businessinsider.com/news/currencies/russia-ruble-currency-decline-us-dollar-capital-flight-wagner-mutiny-2023-7