TALLINN, Estonia (AP) 鈥� Russia鈥檚 central bank made a big interest rate hike Tuesday, an emergency move designed to fight inflation and strengthen the ruble after the country's since early in the war with Ukraine.
The ruble has lost more than a third of its value since the beginning of the year as Moscow increases military spending and Western sanctions weigh on its . The flagging currency does not mean the 鈥� though it is facing challenges, including rising prices for households and businesses, according to analysts who study Russia.
A lower exchange rate allows Moscow to transfer the dollars it earns from selling oil and natural gas into more rubles to pay pensions and run government agencies. But the drop in value went a bit too far, and officials are now tightening it up, analysts say.
While over time sanctions will erode long-term economic growth, the recently weaker ruble 鈥渄oes not imply an underlying economic crisis, it doesn鈥檛 suggest Russia is about to fall off a cliff,鈥� said Chris Weafer, CEO of Macro-Advisory Partners.
The central bank hiked its key rate 3.5 percentage points to 12% after announcing a meeting of its board of directors a day earlier as the ruble declined.
The Russian currency passed 101 rubles to the dollar Monday, hitting the lowest level in almost 17 months. The ruble strengthened after the rate hike announcement but has since given up some of those gains to hit about 98 to the dollar.
The central bank says demand for goods has exceeded the country's ability to expand output, increasing inflation and affecting 鈥渢he ruble鈥檚 exchange rate dynamics through elevated demand for imports.鈥�
Until now, the ruble's decline suited the government because it increased the amount of rubles for each dollar of oil revenue, helping the Kremlin maintain spending on the military and social programs, Weafer said.
The government and the central bank have been able to manage the ruble's decline by telling energy exporters when to exchange their dollar earnings. 鈥淚t is an entirely managed currency,鈥� Weafer said.
That intentional devaluation now "appears to be overdone. I think this is now the message from the central bank 鈥� the weakness was planned, but it's overdone and they want to pull it back,鈥� he said.
Sergei Guriev, provost and professor of economics at the Sciences Po institute of political studies in Paris, also said 鈥渢here is no disaster鈥� despite Russia's economy having 鈥渂ig problems鈥� 鈥� such as the decrease in oil and gas revenue, capital fleeing the country, a budget deficit and the weaker ruble.
It was 鈥減olitically important鈥� for the Russian authorities to have the national currency at less than 100 rubles to the dollar, so once the ruble crossed that sensitive threshold this week, the central bank took action, Guriev said.
A weaker ruble benefits the government but also means 鈥渉igher costs for households and for certain parts of the Russian war machine," Guriev said.
鈥淚f you need to buy (weapon) components in Iran or circumvent sanctions through third countries, you need foreign currency,鈥� Guriev said. 鈥淭hat鈥檚 why you have the budget deficit.鈥�
The rate hike came after President Vladimir Putin鈥檚 economic adviser, Maksim Oreshkin, on Monday blamed the weak ruble on 鈥渓oose monetary policy鈥� in an op-ed, saying the central bank has 鈥渁ll the tools necessary鈥� to stabilize the situation and that he expects normalization shortly.
By raising borrowing costs, the central bank is trying to fight price spikes as Russia imports more and exports less, especially , with defense spending going up and sanctions taking a toll. Importing more and exporting less means a smaller trade surplus, which typically weighs on a country鈥檚 currency.
Inflation reached 7.6% over the past three months, the central bank said. It also hiked rates 1 percentage point last month, saying inflation was expected to keep rising and the fall in the ruble is adding to the risk. Its next meeting is planned for Sept. 15.
After on Russia over the invasion of Ukraine in February 2022, the ruble plunged as low as 130 to the dollar, but the central bank raised its key interest rate to as high as 20% in the days afterward and enacted capital controls that . It later began cutting rates.
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McHugh reported from Frankfurt, Germany.
Dasha Litvinova And David Mchugh, The Associated Press
