How Putin 'destroyed' the ruble and brought Russia to the brink of default

As recently as the 2008 global financial crisis, Russian President Vladimir Putin and his lieutenants had promoted the ruble as a potential alternative to the US dollar, arguing that it should be an integral part of the global financial system. Russia would become one of the world's five biggest economies, they claimed.

Putin's quest to dominate his neighbors, starting with his assault on Georgia in 2008, and continuing with the annexation of Crimea in 2014 and last month's invasion of Ukraine, has shredded what remained of the authoritarian leader's economic dreams.

In early 2008, one US dollar would buy roughly 25 rubles. The Russian currency has depreciated significantly since then, and Western sanctions imposed in response to the invasion of Ukraine have pushed it into freefall. On Wednesday, one US dollar could buy 117 rubles in Moscow after the currency fell 10% and hit a new record low. The ruble has been even weaker in the offshore market this week.

The latest slide came after Russia's central bank banned Russians from buying hard currencies and ordered banks to cap withdrawals from foreign currency accounts at $10,000 for the next six months, moves that could help preserve some of the country's dollar reserves and support the ruble.

Sergey Aleksashenko, a former Russian finance ministry and central bank official, described the strategy as "incredible foolishness" that could lead to a run on the banks.

"Apparently, the outflow of foreign currency deposits from Russian banks has exceeded the Bank of Russia's forecasts and put under question the banks' ability to meet their obligations," he wrote in a newsletter.

"The biggest mistake monetary authority may make in Russia is to touch private savings — if there was no bank run until now, it's going to happen," added Aleksashenko.

Russia has been scrambling to prevent financial meltdown since the United States, European Union and other Western allies imposed sanctions on much of the country's banking system, including freezing hundreds of billions of dollars worth of reserves Moscow had been stockpiling for years to shield the economy. Analysts estimate that more than half of Russia's reserves of foreign currency and gold are now off limits.

The central bank more than doubled interest rates to 20%, and temporarily banned Russian brokers from selling securities held by foreigners. The government has ordered exporters to exchange 80% of their foreign currency revenues for rubles, and banned Russian residents from making bank transfers outside Russia.

The ruble has come under intense pressure, and Moscow's failure to defend the currency will translate to economic pain. Russia is a leading exporter of oil and gas but many other sectors of its economy rely on imports. As the value of the ruble falls, they will become much more expensive to buy, pushing up inflation.

Fitch Ratings slashed Russia's credit rating on Tuesday and warned that a default was "imminent."

"The further ratcheting up of sanctions, and proposals that could limit trade in energy, increase the probability of a policy response by Russia that includes at least selective non-payment of its sovereign debt obligations," the ratings agency said in a statement.

Even with Russia on the brink of default, Western countries are continuing to unleash punishing restrictions designed to further isolate Moscow. The United States and the United Kingdom banned Russian energy imports on Tuesday, and the European Union said it would attempt to reduce natural gas imports by 66% this year.

For Moscow, the costs are adding up. The central bank's decision to prevent Russians from buying US dollars marks the end of the ruble, according to Anders Åslund, an economist and former adviser to the Russian government.

"All ruble convertibility is over. Putin has destroyed the ruble," Åslund said on Twitter.

— Mark Thompson contributed reporting.

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