Ordinary Russians are starting to pay the price for Vladimir Putin’s invasion of Ukraine after its national currency, the rouble, fell to its lowest level in 17 months due in large part to sanctions on Russian crude..As of Monday, the rouble hit 101 to the US dollar, continuing a more than 25% decline since the start of the year. .The Russian central bank was reportedly convening a special meeting on Tuesday to consider steps to support the currency, including the prospect of raising interest rates which presently stand at 8.5%..The rouble plunged as low as 130 to the dollar after Western countries imposed sanctions following the invasion of Ukraine in February of last year. The central bank stepped in with capital controls to stabilize its value at around 50:1 but it has steadily been losing ground ever since..The Russian state news agency TASS reported that Maksim Oreshkin, Putin’s senior economic advisor, blamed “loose monetary policy” for the decline but Western economists say oil sanctions are more likely the cause. .Russia is alternately the second or third-largest oil producer in the world, behind the US and Saudi Arabia at nine million barrels per day. Major Western oil producers such as BP, Exxon and Shell have all pulled out of the country and essentially abandoned their assets amid steep write downs, totalling US$44 billion. .Their participation in the country’s energy sector is considered essential if Russia is to avoid crippling production declines that will in turn hamper the ability to fund its war effort. .That’s because the Kremlin has to sell foreign currency from the National Wealth Fund to make up shortfalls in oil and gas export revenues. Alternatively it buys foreign currency when it posts surpluses..But last week the central bank effectively ended those purchases after tripling them over the past year..It halts the slide in the currency’s near-term value but it also means Moscow will be forced to tax its oil producers at higher rates and reduce subsides for refiners by nearly half to raise an additional US$350 million in revenues..That’s still small change. .According to the International Energy Agency, abut 45% of Russia’s economy is directly tied to oil and natural gas. The US Department of the Treasury estimates that oil revenues have fallen nearly half, to just 23% of the government’s budget estimates..The decline in revenues occurred despite the fact that Russia was exporting 5% to 10% more oil in the first quarter of this year..“This new taxation has the potential to threaten Russia’s future oil production capacity by reducing the incentive for companies to invest in equipment, exploration, and existing fields,” according to a progress report to Congress on the price cap. .“This change comes on top of the impacts already being felt by US sanctions and export controls against Russian energy firms.”.And it could fall even further, causing a death spiral akin to the collapse of the Soviet Union in 1992..Bloomberg Economics estimates that Russia will have to sell nearly a quarter of its sovereign wealth fund’s liquid assets by the end of the year to stay afloat..“If the goal of Western powers was to have their cake and eat it too, then the cap is presently working as planned,” Raad Alkadiri of Eurasia Group wrote.
