The Russian ruble is facing a steep decline, reaching 95 rubles against the dollar and 105 against the euro this week, (chart) leading analysts to ask if the currency is collapsing thanks to sanctions or if it is deliberate policy by the Central Bank of Russia (CBR) to help close the budget deficit that hit is full year target in the first ten days of March.

The ruble's decline has been consistent since December 2022, with occasional turbulence. In the past week, both the dollar and the euro increased in value against the ruble, reaching their highest levels since March 2022, at 95.6 and 105.6 respectively. Officially the reasons for the fall have been blamed on factors like import growth, sanctions impact, and stabilization of global oil prices playing a role.

However, Chris Weafer, the founder and CEO of Macro Advisory and former head of research at multiple Moscow-based investment banks), says that the CBR is in total control of the exchange rate and suggests that the regulator has manipulated the exchange rate lower in order to create more rubles for the budget.

As bne IntelliNews reported, federal budget revenues surged in June as oil exports completed their switch from Europe to Asia reducing the cumulative deficit from RUB3.3 trillion, over the 2% of GDP full year target in March, to RUB2.5 trillion now, less than the 2% target. But revenues in the first half of this year have been negative causing the deficit to balloon. 

Russia’s budget contains an estimate for oil export tax revenues, which is denominated in dollars, but those dollars are converted to rubles to meet expenditures. The upshot is the budget is a big winner of any devaluation as that creates more rubles for spending, even if they are worth less, and will reduce the deficit.

CBR governor Elvia Nabiullina remains fully focused on inflation rate targeting and hiked rates by 100bp in July as inflationary pressures grew, partly thanks to the depreciating ruble. She now expected inflation to increase from the 3.2% posted in June to around 6% by the end of this year, but says that the rate will fall back to the CBR target of 4% next year.

At the same time the fall in the value of the ruble is more than a psychological blow for Russians, as it has tangible consequences. Accelerating inflation was already on the rise due to factors like high budget spending, rising internal demand, and a labour shortage. To ease pressure on the ruble, the government has been forced to abandon one of its key budget principles, which involved using windfall oil profits for current spending.

However, the root cause lies in Russia's own economic policy, with weak budget policies and monetary policies contributing to the ruble's decline, The Bell said in a note. The government's excessive expenditure growth of 20% year-on-year and the Central Bank's monetary policy have exacerbated the situation. The current account shortfall recorded in mid-July has added to the problems.

The falling ruble has led to a rapid acceleration of inflation, impacting an overheating economy and a depleted labour market. Although the official rate of price growth has slowed slightly this week, the underlying rate of inflation remains high.

As the dollar approaches the 100-ruble mark and inflation reaches 10%, there were expectations that the government would take action to address the situation. Reports indicated that the government might abandon the budget rule that allocates oil-and-gas windfalls into currency for the National Wealth Fund for the rest of the year. This budgetary rule has been crucial in Russia's fiscal planning for years.