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The ruble fell to a 16-month low against the dollar as a surge in Russian military spending and slumping export earnings weighed on the ruble, which has been hit by Western sanctions and heightened capital outflows.

The Russian currency, which has lost about 25 percent of its value this year due to fallout from the Ukraine war, fell below 100 rubles to the dollar in early trade on Monday. Oil and gas prices rose sharply following Russia’s first invasion of Ukraine last year, a drop that more than offset the ruble’s appreciation.

The decline has accelerated in recent weeks, with Western sanctions limiting capital inflows and European countries weaning themselves off their reliance on Russian energy supplies reducing their revenue from oil sales, adding to pressure on Moscow’s economy.

The domestic economy has been boosted by the government’s defense spending and social commitments, such as the “coffin payments” received by families of soldiers killed in battle in Ukraine. But it also increases the budget deficit, leading to a devaluation of the currency.

The spending surge helped drive annual imports up 20 percent in the first half of the year.

“There is very little currency coming into the country, so there is a currency famine,” said Vladimir Milov, a former deputy energy minister who now opposes the Kremlin’s exile.

“Imports have now returned to pre-war levels, only now we import all consumer goods and manufactured goods from China, Turkey, Central Asia and the UAE instead of the West. You still have to pay in some currency, but nobody wants to ruble.”

Ruble/dollar spot exchange rate line chart shows ruble weakening as current account surplus collapses

A sharp rate cut last year put further downward pressure on the ruble; the Central Bank of the Russian Federation cut rates from 20% to 7.5% in less than a year.

“Government spending is a direct channel to stimulate imports, but with a short lag,” said Natalia Lavrova, senior economist at BCS Global Markets. “Easy monetary policy can do the same.” effect, but with a longer lag time.”

After the intrusion, there was rare criticism within the system, with Russian propaganda rushing to accuse the central bank, whose head Elvira Nabiullina was attacked by Russian hardliners for being “too liberal” in devaluing the ruble.

“What the hell is going on in this country!? How did this exchange rate come about? Ultimately, this will lead to higher consumer prices, and this will happen at the same time as the election campaign.” Vlaky, one of Russia’s most famous state TV presenters Mir Solovyov, referring to the Russian presidential elections next March.

Billion rubles line chart shows Russian energy revenues take a hit but start to rebound

Trade flows have become a driver of the ruble’s movements after foreign trade in the ruble dried up last spring. Russia’s current account surplus — roughly the difference between exports and imports — fell 85% in the first seven months of this year compared with the same period in 2022, according to official data released last week.

As import costs rise, pressure on the current account could further weaken the currency and fuel inflation. “The ruble tends to hold steady when the current account surplus is close to $5 billion or more,” said Sofya Donets, chief Russia economist at Renaissance Capital, a Moscow-based investment bank. In July, the surplus fell to $1.8 billion.

Last week’s decline prompted the Russian central bank to suspend a budget rule under which it could buy and sell foreign currency from its sovereign wealth fund when oil and gas revenues are above or below certain levels.

Yet there is still a glimmer of hope for Moscow. Revenues from oil and gas, Russia’s main export, fell by more than 40% in the first seven months of this year compared with 2022 levels as the embargo and price caps imposed by the Group of Seven nations depressed prices. But it rebounded in July, surpassing Rs 8,000 crore for the first time since the measures came into effect.

Economists said the suspension of budget rules would remove the incentive for the ruble to weaken, as the impact of higher oil prices in recent weeks hit incomes.

Additional reporting by Hudson Lockett in Hong Kong

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