Further tough decisions will be needed while the Kremlin continues to spend large sums on its Ukraine invasion
Protracted wars are costly and cause economic damage. Ancient Rome discovered that, as did the US in the 1960s when the conflict in Vietnam was one factor behind pressure on the dollar that led eventually to the breakup of the Bretton Woods fixed currency system.
The decision by Russia’s central bank to raise interest rates from 8.5% to 12% to defend the plunging rouble is the latest example of this age-old truth. Eighteen months into the war with Ukraine, Russia’s current account surplus is shrinking and inflationary pressure is growing. The currency is taking the strain, and the trigger for Tuesday’s emergency move appears to have been the rouble hitting 100 to the US dollar on Monday.
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