With apologies to all the… I don’t know, ruble fans (?) out there, the Russian currency is of no consequence.

It wasn’t much in the first place, but now, in the wake of the Ukraine fiasco, it’s just a promissory note backed by Vladimir Putin’s commodities, which are contraband. In that sense, the ruble may as well be scrip issued by a drug cartel. As EM veteran Paul McNamara told Bloomberg’s Odd Lots program earlier this year, “the ruble’s no use to anyone.”

Given that, you can’t blame “anyone” who wants to get out of rubles and into something (anything) else. That’s not lost on the Kremlin, which is why capital controls are necessary in Putin’s backwater pariah state, which by now is just North Korea with lots of gas and lots of culture.

It’s possible that capital outflows are picking up as the war drags on. Russia leaks like a sieve in more ways than one. But the proximate cause of the ruble’s ongoing depreciation — which on Tuesday compelled an emergency rate hike from Elvira Nabiullina — is the collapsing current account balance, which dipped into negative territory in June.

Although commodity prices have rebounded lately, they’re nowhere near levels seen in the aftermath of the invasion, and loose fiscal policy is juicing domestic demand.

That juxtaposition, and the impact of sanctions on Russia’s exports, are responsible for the shrinking surplus illustrated above. That, in turn, is behind the ruble’s slide.

The Kremlin this week shifted blame to Nabiullina, the skilled technocrat credited with helping Putin avert an economic catastrophe last year amid a historic blitz of Western sanctions. Maxim Oreshkin, an economic advisor to Putin, published an Op-Ed in Tass faulting “soft monetary policy” for the currency’s woes and any attendant uptick in inflation.

The pass-through to price growth isn’t complete, but it’s coming. And the last thing Putin needs at a time when the war is starting to come home for everyday Russians courtesy of Ukrainian strikes inside the country and Yevgeniy Prigozhin’s “accidental coup,” is accelerating inflation and a currency crisis.

As I’ve endeavored to make clear over the course of the war, Nabiullina is no slouch. Far from it. She knows what she’s doing, and she realized from the outset how difficult it would be to steer the Russian economy in the event Putin continued to push the war. According to some accounts, she tried to resign following the invasion, but Putin didn’t accept her offer.

The Kremlin claims it’ll run a surplus this quarter, and that the deficit will be consistent with a planned 2% of GDP in 2023. That may well be true, but Oreshkin’s contention that the ruble “has deviated significantly from fundamental levels” is manifestly (i.e., self-evidently) false. What “fundamentals” should the ruble trade on other than the current account at this point? It’ll stabilize when the external balance does.

“Fiscal policy was very loose” in the first half, Goldman’s Clemens Grafe said Tuesday. “While real expenditure growth had indeed fallen, the deficit target would require a sustained tightening of fiscal policy in H2, a correction that seems unusual in a time of military conflict.”

Oreshkin also claimed Nabiullina has “all the necessary tools to normalize the situation,” but that’s not true either. She can tighten capital controls or she can raise rates. She did the latter on Tuesday. The 350bps hike took the policy rate to 12%, the highest since April of last year.

In what I dubbed “Nabiullina’s miracle,” the central bank managed to reverse the entirety of the war-inspired tightening by June of 2022. Now, with the war going poorly, no end in sight and the Kremlin apparently unwilling to concede the obvious reasons for the ruble’s woes, Nabiullina’s mettle will be tested anew.

Not to put too fine a point on it, but if she did try to resign last year, this is why. Dictators don’t accept blame for bad situations. It’s always someone else’s fault.

Last year (and, I’m sure, this year too), Kremlin apologists, including some finance-focused web portals and social media accounts, insisted on the idea that the ruble was “resilient” and that somehow, this would all work out. There was no use arguing: Those portals and the folks behind the social media accounts were either beholden to the Kremlin, committed to counter-narrative or else just ignorant of how things generally work in EM FX. This was never going to be ok.

The ruble is on track for a seventh straight monthly decline. It’s lost nearly a third of its value in 2023.

“Steady growth in domestic demand surpassing the capacity to expand output amplifies the underlying inflationary pressure and has impact on the ruble’s exchange rate dynamics through elevated demand for imports,” the central bank said Tuesday, underscoring the real cause of the problem. “Consequently, the pass-through of the ruble’s depreciation to prices is gaining momentum and inflation expectations are on the rise.”

Ostensibly, the rate hikes (Tuesday’s move was the second in a row) could curb spending, make Russians excited about ruble savings again and limit any capital outflows that might be contributing to the currency’s slide. But that latter contention is silly. If you have the wherewithal to get your money out of Russia, you will.

This situation has the potential to get worse in the event oil prices don’t keep rising or at least stay where they are. “Given the sanctions, we doubt Russia would be able to fund a current account deficit, nor do we think the CBR would be willing to fund it from its reserves,” Goldman’s Grafe went on to say. “Thus, we consider a balanced current account as a binding constraint on the economy, and hitting that constraint would lead to sizable ruble volatility,” the bank added. “While the recent rise in oil prices will likely alleviate that risk somewhat, we interpret the front-loading of the hiking cycle partially as CBR wanting to ensure it keeps the economy away from that BoP constraint.”

Even if crude does keep rising, it’s concerning that the ruble’s slide hasn’t abated amid the recent rebound in energy prices. “The wheels are definitely coming off ‘Fortress Russia,'” Robin Brooks, Goldman’s former head of FX remarked. “The ruble usually has a positive correlation with global oil prices, but that’s over.”