On Tuesday morning, Russia’s Central Bank spiked its baseline interest rate from 8.5 to 12%, responding to the rouble’s swift slide against the dollar. At 99 roubles to the dollar, the currency hit its lowest level since Vladimir Putin launched his full-scale invasion of Ukraine last February — and it appears Russian officials do not have a way out. 

What makes the recent decline all the more notable is that it came less than a week after Russia abandoned its “budget rule”, the mechanism by which the Central Bank buys and sells foreign currency to maintain a balance between the value of the rouble and earnings from national hydrocarbon exports. When things work as envisaged, rouble weakness should make up for lower revenues — as Russia earns less for its commodity exports, the rouble value should be balanced out. What remains is sent to Russia’s National Welfare Fund, its sovereign wealth fund. 

But all is not normal in Russia’s war economy, with the Kremlin reporting that it spent 5.59 trillion roubles on its military in the first half of the year, 37.3% of all government spending. Russian gas sales to Europe are expected to fall by two-thirds this year, from an already decimated base following the shuttering of Yamal and Nord Stream gas pipelines. What makes the rouble’s weakness even more striking is that it comes as oil prices have increased in recent weeks — as have indications that the Kremlin is selling more oil above the $60 price cap imposed by the G7 group of countries than it has admitted.   

Russians see no end to the war in sight, and neither does Putin, who has staked his authority on his invasion of Ukraine. Even after nearly 18 months of Russian controls on the free movement of capital aimed at mitigating the West’s sanctions, money that is earned in Russia is still desperately seeking a route abroad. This is made clear when witnessing the torrent of Russian capital flowing into cities like Tbilisi, Istanbul, and most of all Dubai. 

Given the sanctions on Russia’s banking sector, and the fact that there is negligible demand for roubles abroad, pressure on the currency will remain. Even neighbouring states only recently dependent on the Kremlin such as Kazakhstan have little desire to hold the currency. 

It remains to be seen whether embattled Central Bank head Elvira Nabiullina — who readily accepted Putin’s proposal to extend her term in office after the invasion despite her perceived liberalism — can retain control. The oil price should provide some support for the rouble, but Western sanctions could also tighten the noose as signs of strain within the Kremlin-managed economy continue to bubble up.

Nabiullina has an extensive list of detractors within the Kremlin, many of whom would happily see her replaced with someone they believe will run the economy more in line with their interests. Russian oil can continue to fund Russian guns, but perhaps not indefinitely. If anyone is telling that to Vladimir Putin, though, he is evidently not listening.