Russia’s ruble is at its strongest level in 7 years despite sanctions

Written by Javed Iqbal

Russian one ruble coin and Russian flag displayed on a screen can be seen in this illustration with multiple exposures taken in Krakow, Poland on March 8, 2022.

Jakub Porzycki | Nurphoto | Getty Images

Russia’s ruble hit 52.3 against the dollar on Wednesday, up 1.3% on the previous day and its strongest level since May 2015.

It is a world away from its dive to 139 to the dollar in early March, when the United States and the European Union began rolling out unprecedented sanctions against Moscow in response to the country’s invasion of Ukraine.

The astonishing rise of the ruble in the following months has fueled the Kremlin as “proof” that Western sanctions are not working.

“The idea was clear: crush the Russian economy violently,” Russian President Vladimir Putin said last week during the annual St. Petersburg International Economic Forum. “It did not succeed. Of course it did not happen.”

In late February, after the first fall of the ruble and four days after its invasion of Ukraine began on February 24. Russia more than doubled the country’s key interests rate to as much as 20% from the previous 9.5%. Since then, the value of the currency has improved to the point that it has lowered interest rates three times to reach 11%. in late May.

In fact, the ruble has become so strong that Russia’s central bank is actively taking steps to try to weaken it for fear that it will make their exports less competitive.

But what is really behind the rise of the currency, and can it be maintained?

Russia is reaping record oil and gas revenues

The reasons are, to put it simply: strikingly high energy prices, capital controls and the sanctions themselves.

Russia is the world’s largest exporter of gas and second largest exporter of oil. Its primary customer? The European Union, which has bought Russian energy for billions of dollars a week and at the same time tried to punish it with sanctions.

It has put the EU in an awkward position – it has now sent exponentially more money to Russia in oil, gas and coal purchases than it has sent Ukraine in aid, which has helped fill the Kremlin’s coffin. And with Burnt crude oil prices 60% higher than they were this time last year, although many western countries have slowed their Russian oil purchases, Moscow still gives a record profit.

Russian President Vladimir Putin and Defense Minister Sergei Shoigu are attending a wreath-laying ceremony marking the anniversary of the beginning of the great patriotic war against Nazi Germany in 1941, at the tomb of the unknown soldier at the Kremlin wall in Moscow, Russia in June. 22, 2022.

Mikhail Metzel Sputnik Reuters

In the first 100 days of the Russia-Ukraine war, the Russian Federation collected $ 98 billion in revenues from fossil fuel exports, according to Center for Research on Energy and Clean Air, a research organization based in Finland. More than half of this revenue came from the EU, at around $ 60 billion.

And while many EU countries are committed to reducing their dependence on Russian energy imports, this process could take years – by 2020, the bloc will trust Russia for 41% of its gas imports and 36% of its oil imports, according to Eurostat.

Yes, it The EU adopted a landmark sanctions package in May partially banned the import of Russian oil before the end of this year, but it had significant exemptions for oil supplied via pipelines, as landlocked countries such as Hungary and Slovenia could not access alternative oil sources sent by sea.

“The exchange rate you see for the ruble is there because Russia earns record-high foreign exchange surpluses,” Max Hess, a fellow at the Foreign Policy Research Institute, told CNBC. This income is mostly in dollars and euros via a complex ruble-swap mechanism.

“Although Russia may be selling a little less to the West right now, as the West moves to cut off [reliance on Russia], they still sell a ton at all-time high oil and gas prices. So, bottom line is that this is a big payoff. ”

Russia’s balance of payments surplus from January to May this year was just over $ 110 billion, according to Russia’s central bank – more than 3.5 times the amount for the period last year.

Strict capital controls

Capital controls – or the government’s restriction of foreign currency leaving its country – have played a big role here, plus the simple fact that Russia can not import so much more thanks to sanctions, which means it spends less of its money on buy things elsewhere from.

It really is a Potemkin rate because it is incredibly difficult to send money from Russia abroad given the sanctions – both against Russian people and Russian banks.

Max Hess

Fellow, Foreign Policy Research Institute

“The authorities implemented pretty strict capital controls as soon as the sanctions came,” said Nick Stadtmiller, director of emerging market strategy at Medley Global Advisors in New York. “The result is that money flows in from exports, while there are relatively few capital outflows. The net effect of all this is a stronger ruble.”

Russia has now relaxed some of its capital controls and lowered its interest rates in an attempt to weaken the ruble, as a stronger currency actually damages the country’s financial account.

The ruble: really a ‘Potemkin course’?

Because Russia is now cut off from the international SWIFT banking system and blocked from trading internationally in dollars and euros, it has been left to essentially trade with itself, Hess said. This means that while Russia has built up a formidable volume of foreign reserves that strengthen its currency at home, it cannot use those reserves to serve its import needs, thanks to sanctions.

The ruble’s exchange rate “is really a Potemkin exchange rate because sending money from Russia abroad given the sanctions – both against Russian individuals and Russian banks – is incredibly difficult, not to mention Russia’s own capital controls,” Hess said.

In politics and economics, Potemkin refers to false villages that were allegedly built to give the illusion of prosperity to the Russian Empress Catherine the Great.

“So yes, the ruble on paper is a lot stronger, but it’s the result of crashing imports, and what’s the point of building up foreign exchange reserves but going and buying things from abroad that you need for your economy? And Russia can do not do it.”

People are queuing near euro and US dollar exchange rates for the ruble sign at the entrance to the exchange office on May 25, 2022 in Moscow, Russia. Russia moved closer to a standard on Wednesday after the US Treasury Department issued a key exemption for sanctions.

Konstantin Zavrazhin | Getty Images

“We should really look at the underlying problems in the Russian economy, including crater imports,” Hess added. “Even if the ruble says it has a high value, it will have a devastating effect on the economy and on the quality of life.”

Does this reflect the actual Russian economy?

Does the strength of the ruble mean that Russia’s economic fundamentals are sound and have escaped sanctions? Not so fast, analysts say.

“The strength of the ruble is linked to a surplus in the overall balance of payments, which is much more driven by exogenous factors associated with sanctions, commodity prices and policy measures than by long-term underlying macroeconomic trends and fundamentals,” said Themos Fiotakis, chief currency officer. research at Barclays.

This was stated by the Russian Ministry of Economy in mid-May it expects unemployment to hit almost 7% this year, and that a return to the 2021 level is unlikely before 2025 at the earliest.

Since Russia’s war in Ukraine began, thousands of international companies have left Russia, leaving a large number of unemployed Russians in their wake. Foreign investment has received a massive hit, and poverty almost doubled in just the first five weeks of the war alone according to Russia’s federal statistics agency Rosstat.

“The Russian ruble is no longer an indicator of the health of the economy,” Hess said. “While the ruble has risen thanks to the intervention of the Kremlin, its inattention to the welfare of the Russians continues. Even Russia’s own statistics bureau, famous for massaging numbers to achieve the Kremlin’s goals, acknowledged it the number of Russians living in poverty increased from 12 [million] to 21 million people in the first quarter of 2022. “

As to whether the strength of the ruble can be maintained, Fiotakis said: “It is very uncertain and depends on how the geopolitics develops and the policy adapts.”

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Javed Iqbal

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