The Real Ruble Exchange Rate: Balancing Inflation and Geopolitics
The Ruble’s recent fluctuations require an assessment of its dynamics. However, the nominal dollar-ruble exchange rate does not always reflect the true value of the Russian currency. It is crucial to consider the inflation differences between Russia and its trading partners and the structure of trade relations. These factors provide a comprehensive view of fluctuations in the ruble’s value.
The nominal effective exchange rate’s dynamics show how the ruble’s value changes against a basket of currencies from Russia’s primary trading partners, considering their proportions in foreign trade turnover.
The real effective exchange rate considers changes in the value of the Russian currency adjusted for inflation differences between Russia and its trading partners. This approach enables the assessment of the ruble’s purchasing power and its value relative to other currencies.
Analysis of real exchange rates shows a significant correlation with important economic and political events. The appreciation of the ruble often coincides with periods of high oil prices and positive trade balance dynamics. The decline in the national currency’s exchange rate was linked to political tensions, trade restrictions, and geopolitical conflicts – all during times of crisis and inflationary pressures. The adoption of a floating exchange rate regime in 2014 also impacted the currency’s volatility.
It is important to recognize the significant fluctuations in the ruble exchange rate over the previous two decades. The nominal and real effective exchange rate of the ruble to foreign currencies from 2004-2023 has been impacted by several events including the global financial crisis of 2008, the collapse in oil prices, and the imposition of sanctions in 2014, the COVID-19 pandemic, geopolitical conflict, and sanctions in 2022-2023. The most significant volatility was observed in 2014-2015 and 2022-2023.
Structural changes occurred in 2022, impacting the economic situation in Russia. Restrictions on trade with Western countries led to a restructuring of supply chains and an increase in trade turnover with Asian, African, and Latin American countries, affecting the real exchange rate of the ruble. Additionally, the budget rule, which previously stabilized the exchange rate in response to sudden fluctuations in oil prices, was suspended and later revised. As of 2022, the exchange rate is more dependent on trade balance and exchange controls.
From January 2004 to September 2023, the ruble’s nominal effective exchange rate depreciated by 48% against major trading partner currencies. Meanwhile, the real effective exchange rate increased by 12%. Thus, indicating that inflation in Russia is substantially higher compared to its partner countries.