Russia’s earning from oil stays low as war expenses mount: Report  

The Russian economy is beset by a challenge: how to finance the military without weakening the national currency and overheating the economy with inflation.

The Russian rouble’s instability reveals a weakness in President Valdimir Putin’s tight-lipped economy, which the Kremlin’s economic team promptly patched up, allowing the currency to temporarily regain its stability, The Associated Press reported.

The Russian economy is beset by a challenge: how to finance the military without weakening the national currency and overheating the economy with inflation. Reports say that the patch, an emergency interest rate increase, cannot solve this problem.

A few economic setbacks are clear, particularly for the auto sector when Western manufacturers stopped doing business in Russia. However, Chinese auto imports have been steadily increasing.

Although it is exorbitantly expensive and constrained by visa and airline restrictions, the wealthy continue to manage it and those on low incomes couldn’t afford it to begin with.

Russia being one of the largest oil exporters in the world is now under pressure to devalue its currency because of Western sanctions that are reducing the amount of money it makes from exporting oil. As a result, the country’s trade surplus with the rest of the globe is decreasing. Additionally, Russian consumers and businesses are purchasing more imported goods.

The rouble is usually supported when export revenues exceed import expenses. While the rouble has progressively fallen due to the shrinking trade surplus, Moscow has gained because a lower exchange rate actually makes it easier for the government to pay its expenditures.

This is due to the fact that the dollars made from the sale of oil may be converted into more rubles, which can then be used to fund government operations, employee wages, and pensions.

However, the Russian ruble fell to its lowest on August 14, below 100 rubles to the dollar. In order to reduce local demand for imports, the central bank implemented a significant emergency interest rate increase of 3.5 percentage points. After the rate hike, the currency increased to 92 to the dollar, but it has since slowly declined; on Wednesday, it was trading at 96 to the dollar.

Even while the currency rate is lower than it was at 60 rubles to the dollar last year, an economic crisis may not arise if a freefall can be prevented.

Following the 2014 capture of Ukraine’s Crimean Peninsula, the Kremlin has worked to protect the economy from sanctions. By forbidding imports from the European Union, it also forced manufacturers to obtain parts locally and has moved food production to local businesses.

The government has strong reserves and little debt as a result of oil revenue, while sanctions have blocked nearly half of those reserves.

But in the long run, Robin Brooks, chief economist at the Institute of International Finance, warned that Putin’s military spending and sanctions are putting Russia's economy under “slow burn” strain.

Not all is lost for Russia

Despite extensive sanctions related to the Ukraine conflict and the departure of hundreds of well-known Western enterprises, life in Moscow appears to be going on as usual.

On first glance, malls don’t appear to have altered, but consumers now find new apparel companies like Maag and Vilet where Zara and H&M once had their stores. Additionally, the Krispy Kreme that once had its outlet in the Evropeyskaya Mall could be confused for the doughnut vendor Krunchy Dream as the branding is identical. Banks offer stickers with a chip that allows mobile payment as Apple Pay is no longer operational in the country.

Reports say that economic indicators are within normal bounds. Economic growth has exceeded expectations, unemployment is low, and inflation, which was 4 per cent in July according to Russian standards, is high for those with low incomes.

As more items pass through neighbouring nations like Kazakhstan and Armenia to evade sanctions, imports into Russia are on the rise. Money is being given to people and businesses through government spending on the military and social programs, some of which is being spent on imported goods.

Salaries are also being supported by labour shortages brought on by emigration, while government-backed mortgages encourage real estate transactions.

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