A Russian one ruble coin and a Russian flag displayed on a screen are seen in this multiple exposure illustration photo taken in Krakow, Poland, March 8, 2022.
Jakub Porzycki | Nurphoto | Getty Images
The Russian ruble hit 52.3 to the dollar on Wednesday, an increase of around 1.3% from the previous day and its highest level since May 2015.
That’s a world away from its plunge to 139 to the dollar in early March, when the United States and European Union began applying unprecedented sanctions on Moscow in response to its invasion of Ukraine.
The ruble’s meteoric rise over the following months fueled the Kremlin as “proof” that Western sanctions are not working.
“The idea was clear: to violently crush the Russian economy,” Russian President Vladimir Putin said last week at the annual St. Petersburg International Economic Forum. “They didn’t succeed. Obviously that didn’t happen.”
At the end of February, after the initial fall of the ruble and four days after the start of its invasion of Ukraine on February 24, Russia more than doubled the country’s key interest rate to 20% from 9.5% previously. Since then, the value of the currency has improved to the point that it cut the interest rate three times to reach 11% at the end of May.
The ruble has in fact become so strong that Russia’s central bank is actively taking steps to try to weaken it, fearing it will make its exports less competitive.
But what is really behind the currency’s rise, and can it be sustained?
Russia rakes in record oil and gas revenues
The reasons are, to put it simply: surprisingly high energy prices, capital controls and the sanctions themselves.
Russia is the world’s largest gas exporter and the second largest oil exporter. His first client? The European Union, which buys billions of dollars worth of Russian energy every week while trying to punish it with sanctions.
This has put the EU in a sticky situation – it has now sent exponentially more money to Russia in purchases of oil, gas and coal than it has sent in aid to Ukraine, which helped fill the Kremlin’s war chest. And with Brent prices 60% higher than they were this time last year, even though many Western countries have curbed their purchases of Russian oil, Moscow is still making a record profit.
Russian President Vladimir Putin and Defense Minister Sergei Shoigu attend a wreath laying ceremony, marking the anniversary of the start of the Great Patriotic War against Nazi Germany in 1941, at the Tomb of the Unknown Soldier near the Kremlin wall in Moscow, Russia June 22, 2022.
Mikhail Metzel | sputnik | Reuters
In the first 100 days of the Russo-Ukrainian war, the Russian Federation reaped $98 billion in revenue from fossil fuel exports, according to the Center for Energy and Clean Air Research, a research organization. research based in Finland. More than half of this revenue came from the EU, around $60 billion.
And while many EU countries intend to reduce their dependence on Russian energy imports, this process could take years – in 2020 the bloc depended on Russia for 41% of its energy imports. gas and 36% of its oil imports, according to Eurostat.
Yes, the EU passed a landmark sanctions package in May partially banning Russian oil imports by the end of this year, but it had significant exceptions for oil delivered by pipeline, since landlocked countries like Hungary and Slovenia could not access alternative oil sources that are shipped by sea.
“That exchange rate you see for the ruble is there because Russia is running record current account surpluses in foreign currencies,” Max Hess, a researcher at the Foreign Policy Research Institute, told CNBC. These revenues are mainly in dollars and euros via a complex ruble exchange mechanism.
“Although Russia may be selling a little less to the West right now as the West prepares to cut [reliance on Russia], they still sell a ton at record oil and gas prices. So that’s generating a big current account surplus.”
Russia’s current account 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 in this period last year. .
Strict capital controls
Capital controls – or the government’s limitation of foreign exchange leaving its country – played a big role here, as well as the simple fact that Russia can no longer import as much thanks to sanctions, which means it spends less money to buy things from elsewhere. .
“The authorities put in place pretty tight capital controls as soon as the sanctions came into effect,” said Nick Stadtmiller, director of emerging markets strategy at Medley Global Advisors in New York. “The result is that money is pouring in from exports while there is relatively little capital outflow. The net effect of all of this is a stronger rouble.”
Russia has now eased some of its capital controls and lowered its interest rate in an effort to weaken the ruble, as a stronger currency actually hurts its fiscal account.
The rouble: really a “Potemkin rate”?
Because Russia is now cut off from the international SWIFT banking system and prevented from trading internationally in dollars and euros, it had to essentially trade with itself, Hess said. This means that while Russia has accumulated a tremendous volume of foreign exchange reserves that strengthen its national currency, it cannot use these reserves to meet its import needs, thanks to the sanctions.
The ruble exchange rate “is really a Potemkin rate, because sending money from Russia abroad given the sanctions – both on Russian individuals and Russian banks – is incredibly difficult, not to mention the capital controls from Russia,” Hess said.
In politics and economics, Potemkin refers to fake villages that were supposedly built to give Russian Empress Catherine the Great an illusion of prosperity.
“So yes, the ruble on paper is a bit stronger, but that’s the result of the collapse of imports, and what’s the point of building up foreign exchange reserves, but going abroad to buy things you have need for your economy? And Russia can’t do that.”
People line up near euro and US dollar rates to sign ruble at the entrance to the exchange office on May 25, 2022 in Moscow, Russia. Russia edged closer to default on Wednesday after the US Treasury let a key sanctions waiver expire.
Konstantin Zavrazhin | Getty Images
“We really should be looking at the underlying issues in the Russian economy, including the fall in imports,” Hess added. “Even if the ruble says it has a high value, it is going to have a devastating impact on the economy and on the quality of life.”
Does this reflect the reality of the Russian economy?
Does the strength of the ruble mean that Russia’s economic fundamentals are sound and have escaped the blow of sanctions? Not so fast, analysts say.
“The strength of the ruble is linked to an overall balance of payments surplus, which is driven much more by exogenous factors related to sanctions, commodity prices and policy measures than by macroeconomic trends and underlying fundamentals. longer term,” said Themos Fiotakis, head of FX. research at Barclays.
Russia’s economy ministry said in mid-May that it expects unemployment to reach nearly 7% this year and that a return to 2021 levels is unlikely before 2025 at the earliest.
Since the beginning of the Russian war in Ukraine, thousands of international companies have left Russia, leaving in their wake a large number of unemployed Russians. Foreign investment was hit hard and poverty almost doubled in the first five weeks of the war alone, according to the Russian federal statistics agency Rosstat.
“The Russian ruble is no longer an indicator of the health of the economy,” Hess said. “While the ruble has surged thanks to Kremlin interference, its inattention to Russia’s well-being continues. [million] to 21 million people in the first quarter of 2022.”
On whether the ruble’s strength can be sustained, Fiotakis said, “It’s very uncertain and depends on how geopolitics evolves and politics adjusts.”