The Global Economy Article Commentary

Title of the article: Russia’s central bank makes huge interest rate hike to try to prop up
falling ruble
Source of the article: https://apnews.com/article/russia-central-bank-ruble-interest-rates-
a680b840eaae767471180e2dca34fc86
Accessed: 10/9/2023
Date the article was published: 15/8/2023
Date the commentary was written: 12/9/2023
Word count of the commentary: 800
Unit of the syllabus to which the article relates: The Global Economy
Key concept being used: Interdependence

Global Economy Commentary

An expensive war with Ukraine has brought heavy consequences upon Russia’s economic
frontiers. In its wake, the ruble has seen a worrying decline in value, prompting hasty
countermeasures in the form of hiked interest rates from the central bank. As Russia is
burdened by an overreliance on imports and new threats of western sanctions arise amidst
threats of war, it loses parts of its imperative Interdependence.

Reaching a 17-month low, the Russian currency passed 101 rubles to the Dollar in August,
signaling greater costs for the Russian population. Russia, initially devaluing their currency to
benefit from a stronger dollar through energy sales, has stated that “the drop in value has
gone a bit too far”. According to the article, “demand for goods has exceeded ability to
expand output”, resulting in an “elevated demand for imports”. In supplying more imports,
Russia supplies further rubles to the FOREX market, resulting in the rubles depreciation.
Unfortunately worsening the situation, also came the newly introduced western sanctions.
While Russia relied on healthy interdependence to sustain their major exports, such
restrictions weigh heavily on the demand of the ruble, heavily depreciating it.

The weaker ruble results in increasingly expensive imports, indicating a higher production
cost for some domestic firms in their purchasing of factors of production. As profit
maximisers, these firms will respond to heightened costs by sharing them with consumers
through raised prices. As consumer spending surges, concerns arise through rising inflation
rates due to demand pull inflation, reaching “over 7.6% in the past 3 months”.

Diagram 1. Supply and Demand for rubles

This diagram whilst presenting both demand and supply shifts of the ruble, sees the shared
depreciation of the ruble. The diagram above shows a rightward shift in the supply curve for
rubles (S1->S2), resulting in an increase of its quantity within the Forex market (Q1->Q2).
As imports are being increasingly demanded, consumers trade for foreign currencies by
supplying Rubbles in the FOREX market, increasing its quantity. The depreciation of the
ruble is shown through a lowered price of rubles to the dollar (p1->p2). Economic theory
claims a positive correlation between scarcity and price; thus, its lessened value can be
attributed to its increased quantity.
The diagram also presents a left-ward shift of the demand curve with a loss of Russian
exports as many of its products are sanctioned internationally (D1->D2). Being less
demanded by foreign markets, its decrease in value can be seen from its reduced value
represented in p3 of 130 rubles to the dollar. Such depreciation is caused by Russia's loss of
its major exports such as oil and gas, components that were integral to its interdependence.
Furthermore, in viewing the ruble’s unpopularity, portfolio investor confidence may falter,
amplifying depreciation.

In combating the tumbling ruble, the central bank possesses “all the tools necessary to
stabilize the situation” as proclaimed by President Putin’s economic adviser. With that, the
central bank hiked its key rate 3.5 percentage points to 12%, in hopes of attracting foreign
portfolio investors, thus restoring some amounts of interdependence, and appreciating the
ruble. Moreover, with surging inflation rates, raised interest rates may be key in reducing
demand-pull inflation. However, this also implies a decreased quantity of domestic spending
as economic decision makers are made conscious of increasingly expensive borrowing rates.
Furthermore, as the ruble's re-appreciation is subject to time lags, domestic consumers may
suffer greatly in the short term, burdened by increased purchasing and borrowing costs.

Diagram 3. Increased demand for the ruble.

As interest rates rise, foreign portfolio investors are attracted by greater levels of profit
opportunities in the ruble through its higher returns. With a significant hike of 3.5%, the ruble
will likely draw in large inflows of foreign currency. This is shown in the diagram above
through a rightward shift in the demand curve for rubles (D2->D3). While demand initially
retracted amidst western sanctions in D2, its re-appreciation is seen with a new influx of
investors in demand for rubles in D3. Subsequently, the ruble’s strengthened demand is
presented in its increase of value through e2 to e3, as further competition amongst investors
leads to higher prices signaling greater independence.

The ruble's depreciation has caused rising costs for Russia. Along with surging inflation rates
and threats of greater western sanctions, interest rates provide a somewhat viable band-aid for
Russia’s financial wounds. While lingering concerns of the excess supply of rubles within the
FOREX market remain, Russia’s hiking of interest rates stand as a sound means of restoring
its currency and ensuring a temporary equilibrium amidst a brewing storm.
Russia’s violent warpath has stripped it of optimal interdependence. Its gradual
overdependence on imports along with the crippling consequences of western sanctions have
highlighted Russia’s difficulty in achieving economic stability. In recovering, Russia seeks to
revitalize its economic prospects in restoring international investors through increased
interest rates, thus restoring some means of interdependence.