Russia economy in meltdown as Moscow issues embarrassing rouble update

Russia could face a run on the rouble, leading to higher inflation and adding to the country's economic woes. Consumers and businesses have been hit by a double whammy of spiralling inflation and high interest rates.

Last year Russia's Central Bank was forced to hike its key interest rate to 21% - the highest level in some 20 years. The move was in response to growing inflation, which in April had hit 10.2% - up from 9.5%. However, food prices have surged well above the official inflation rate, in a bitter blow for shoppers.

Over the last year, the cost of milk and apples has gone up by approximately 20%, cucumbers by 22%, beetroot by 32%, butter by 35%, cabbages by 42%, onions by 46%, and potatoes by a whopping 90%.

Many businesses are also struggling to pay back bank loans, and are facing a fight for their survival.

Sergey Chemezov, the head of Russia's defence conglomerate Rostec and a former KGB colleague of Putin, warned that hundreds of companies could go bust.

Now the Kremlin is facing a potential devaluation in the rouble, which could have negative consequences for the economy.

The rouble has surged about 40% against the dollar to around 80 this year.

Analysts widely see it as overvalued and cite a failure of Ukraine peace talks, a possible interest rate cut and further falls in oil prices as likely triggers for a slide.

A Kremlin source told Reuters that if the rouble fell to 110-120 to the dollar, this would cause a further hike in inflation, although it would help maximise oil revenues.

Experts believe that the most likely cause for a run on the national currency would be a failure of the upcoming peace talks to secure a lasting ceasefire in Ukraine.

Economist Evgeny Kogan said the rouble's real exchange rate, adjusted for inflation, was 12% stronger than in 2019 and 14.9% stronger than the 10-year average

"Russian and international capital have entered Russia hoping that negotiations will advance and sanctions, especially financial ones, will be eased," he said.

"If these hopes are not realised, this capital will quickly turn around and leave."