Russia's ruble is in freefall, fast approaching the 100-per-dollar mark—a level that would have once triggered panic. Yet, this time around, the Kremlin seems unbothered, allowing the currency to crash without immediate intervention. Why? According to insider sources, a weaker ruble plays into the government's financial strategy, especially with an expected surge in government spending next year. Russian officials, it seems, are comfortable with the ruble sinking to 100 per dollar.

A Deliberate Decline

The ruble's sharp decline is partially exacerbated by changes in how its value is calculated, as the Moscow Exchange no longer trades major global currencies like the dollar and euro. The foreign currency shortage, worsened by sanctions, took another hit when the U.S. imposed an October 12 deadline for entities to exit the Moscow Exchange. This only added to the ruble's troubles, which has weakened by around 9% since sanctions began. Oleg Vyugin, a former Bank of Russia official, remains dismissive of the concerns, despite inflation creeping higher.

Impact on China’s Yuan and Capital Controls

Russia's currency troubles extend beyond the dollar. The ruble has also slid significantly against China's yuan—the Kremlin's go-to currency since its 2022 invasion of Ukraine and subsequent Western sanctions. With an 11% drop against the yuan, the ruble is at its weakest against the Chinese currency since May, marking a troubling shift for Russia’s preferred method of international trade.

To counterbalance this, Russia has leaned heavily on capital controls. Last year, the central bank stepped in with a dramatic interest rate hike, pushing it up 350 basis points when the ruble previously crossed the 100-per-dollar mark. The government also demanded that 43 exporting companies convert 80% of their foreign earnings into rubles to support the domestic market, though these measures have now been relaxed as officials scale back the conversion rate.

However, this hasn’t eased the pressure on the ruble. Larger exporters cut their foreign currency sales by 30% in September, favoring ruble-based transactions as sanctions limit access to dollars, euros, and even yuan. The Ministry of Economy forecasts the ruble's weakness will persist into 2025, with an average exchange rate of 96.5 rubles per dollar, compared to 91.2 rubles this year.

Sanctions and the Squeeze on Exporters

The ruble's weakness isn’t just a result of government decisions. America's threat of secondary sanctions on Russian banks' key trading partners—particularly China and Turkey—has squeezed Russia’s access to foreign currency further. Russia has responded by dialing back the stringent currency controls that once bolstered the ruble, allowing the largest exporters to reduce foreign currency sales in the domestic market.

This relaxation, though, has created liquidity challenges for companies heavily reliant on international trade. Exporters are finding it increasingly difficult to receive payments from foreign banks, with transactions often delayed for weeks and the ever-present risk of rejection due to sanctions. Some firms have resorted to manual interventions, with executives from major commodity producers admitting to calling banks daily to resolve payment delays.

The Central Bank’s Tightrope: Inflation and Interest Rates

Russia’s central bank faces a challenging balancing act. After the initial post-invasion collapse of the ruble, aggressive rate hikes helped stabilize the currency. Interest rates soared to 20% before gradually falling to 19%—still high but not enough to calm concerns over inflation, which now sits at more than double the bank’s 4% target. As the war economy overheats, another rate hike could be on the horizon to rein in rising prices.

But these measures only add to the woes of Russian businesses. Borrowing costs, both for rubles and foreign currencies, have surged beyond 20%, making it more difficult for exporters to finance operations. And with the yuan—the ruble’s key foreign trading currency—becoming scarcer, liquidity shortages are straining the system.

Putin’s Response: BRICS Payment System

President Vladimir Putin has acknowledged the mounting problems with cross-border payments, calling them a “serious challenge” in an October 4 meeting with the Security Council. Top exporters sold just $8.3 billion in foreign currency last month—a 30% drop—relying more heavily on the ruble in international settlements. But even the yuan, once seen as a stable alternative, is becoming harder to obtain.

In response, Putin is pushing for a new international payment system within the BRICS bloc (Brazil, Russia, India, China, and South Africa), possibly even built on blockchain technology. This initiative, designed to circumvent reliance on the dollar, is set to be a key topic at an upcoming summit in Kazan. For Russia, it represents yet another move in its ongoing efforts to undermine the global dominance of the U.S. dollar, regardless of the cost to its currency.

Conclusion: A Sacrifice for a Strategic Goal

Russia’s current approach signals a long-term strategy: sacrificing the ruble to advance its geopolitical and economic goals. The ruble’s decline, while damaging in the short term, may ultimately serve the Kremlin’s larger ambitions—defeating Western influence, especially that of the U.S. dollar, by any means necessary. Yet, this strategy comes with high risks: soaring inflation, liquidity crises, and growing discontent among exporters struggling to manage their finances. As Russia looks to the BRICS and alternative systems, only time will tell whether these efforts pay off or further entrench the economic difficulties that come with isolating its currency from global trade.