Putin claims ‘everything is under control’ as inflation spikes and ruble plummets

The Russian ruble has once again plunged to levels not seen since the early days of the Kremlin’s war against Ukraine. After a gradual decline throughout November and a sharp drop during this week’s “Black Wednesday,” the currency stabilized on Thursday at 109.5 rubles per dollar, according to the exchange rate set by the Central Bank of Russia. This marks its weakest rate since March 2022, when the initial wave of Western sanctions caused the ruble to briefly plummet beyond 140 rubles per euro. Prior to the invasion, the ruble traded around 80 per euro, and a decade ago — before the illegal annexation of Crimea — it was under 40. Despite this significant devaluation, the Central Bank has ruled out injecting foreign currency into the economy to stabilize the ruble.

“It is not easy, neither in our country nor in neighboring countries, but everything is under control, everything is going according to plan,” Russian President Vladimir Putin claimed. This echoed his earlier assertions during the first year of the war that the military operation was also “going according to plan.” “There is absolutely reason for panic,” he added.

Despite these reassurances, retailers are bracing for yet another round of price hikes. Prices were last revised in September after the summer lull, when they unexpectedly began rising again instead of falling as authorities had predicted. Official data from the Ministry of Economic Development reports annual inflation at 8.77%. However, the Central Bank’s “inflation perception” metric — reflecting how the public feels about price increases — places the year-on-year figure at 15.3%. Independent studies suggest an even steeper rise in prices.

Russia is heavily reliant on imports, and the Kremlin’s push to replace foreign products with “made in Russia” alternatives has largely failed, with the exception of the food sector. This dependency is now taking a toll on Russian consumers’ wallets. Several major distributors, including SEB-Vostok — responsible for brands like Tefal, Rowenta, and Krups — have announced price hikes of around 10% starting Monday, December 2. “We have been trying to curb the hikes over the past two months, but the current conditions no longer allow it,” Dmitry Shashkin, general director of Russian distribution company Kuppersberg, told Kommersant newspaper.

The real financial strain, however, is expected to hit in January. Sources within the distribution industry have revealed that consumer goods prices may surge by 20% at the start of 2025. This increase coincides with the renewal of retailer contracts, which until now have secured products at an exchange rate of roughly 85 rubles to the dollar. According to industry insiders, these adjustments will reflect the ruble’s continued decline.

Inflation is also impacting transportation costs. The national railway company, RZHD, is set to raise passenger ticket prices by 11.6% starting December 1, alongside a 13.8% increase in freight transport fees. This freight hike will ripple through to the cost of importing goods from Asia — Russia’s main trading partner, following the European Union’s sanctions.

Sergey Dubinin, who served as head of the Central Bank of Russia from 1995 to 1998, has cautioned that inflation is likely to remain a long-term challenge. “This doesn’t mean that the economy will collapse tomorrow or stop functioning. Our neighbors in Turkey have experienced inflation of around 50% for several years. I am not saying this is good, but it is a long process,” Dubinin told the Russian daily URA.

Elvira Nabiullina, the current head of the Central Bank of Russia, has opted against immediate intervention to defend the ruble. “The Bank of Russia has decided that, from 28 November through 31 December 2024, it will not buy foreign currency in the domestic FX market,” the institution announced following “Black Wednesday.” This decision aligns with Russia’s budget rule, which mandates that the Finance Ministry either sells currency from the National Welfare Fund to offset revenue deficits from gas or oil exports, or purchases foreign currency during revenue surpluses.

Many Russian analysts had predicted an exchange rate of around 115 rubles per euro by year-end, though prior central bank interventions had kept the rate near 100. For comparison, a year earlier, the ruble was trading at 75, buoyed by a controlled exchange rate enforced by the central bank and the Finance Ministry. On international markets like Forex, however, the ruble has recently plunged to 114 per dollar.

The ruble’s sharp decline has been exacerbated by recent U.S. sanctions targeting one of the Kremlin’s key foreign currency sources. The U.S. Treasury Department imposed sanctions on nearly 50 Russian banks, including Gazprombank, which plays a pivotal role in Russia’s access to foreign currency through platforms like the UnionPay payment system — a workaround to the SWIFT system ban. These sanctions have been enforced by several of Russia’s trading partners, including China, the UAE, Turkey, and even some European countries such as Germany and Hungary.

Russia’s economy is grappling with this financial strain while dedicating a third of its budget to war-related expenditures, with substantial payments due by year’s end. The sanctions and the ruble’s depreciation have created a volatile mix, driving up prices domestically. Reports suggest that “friendly” countries like Turkey, Egypt, and Iran have temporarily halted fruit exports to Russia due to the ruble’s collapse, according to the trade publication EastFruit.

The Central Bank of Russia noted that a 10% depreciation in the ruble typically results in a 0.5 percentage point rise in inflation. Since the summer, this effect has already added an estimated 1.5 percentage points to inflation, according to Reuters. Russian banks, however, argue the actual impact is far greater. “We believe the central bank underestimates the price transmission effect,” warned Dmitry Pinov, president of VTB, on Thursday. “Given that imports constitute 25% of the consumption basket, the effect is much stronger. Our models indicate an impact five times greater than what the central bank suggests.”

The Central Bank of Russia has been criticized for its handling of inflation and currency devaluation. It raised interest rates to 21% to cool inflation and an economy overheated by military spending. In October, it revised its 2024 inflation forecast from a range of 6.5%–7% to 8.5%–9%. While the central bank has refrained from direct intervention, citing market volatility, it has not ruled out emergency measures if the ruble’s slide worsens. “The decision to resume operations on the domestic exchange market [...] will be made based on the current situation in financial markets,” the central bank stated.

The Kremlin, meanwhile, appears to be showing signs of unease. This was evident during Putin’s visit to Kazakhstan on Wednesday, when a journalist raised concerns about the currency’s collapse. Dmitry Peskov, Putin’s spokesperson, deflected the question with a defensive response: “In what currency do you receive your salary? Most of our agreements with Kazakhstan are in rubles and tenges, and we are happy about this.”

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