Russian one ruble coin and Russian flag displayed on a screen are seen in this multi-exposure illustration photo taken in Krakow, Poland on March 8, 2022.
Jakub Porzycki | Nurphoto | Getty pictures
Russia’s ruble reached 52.3 against the dollar on Wednesday, an increase of about 1[ads1].3% from the day before and the strongest level since May 2015.
It is a world away from falling to $ 139 in early March, when the United States and the European Union began rolling out unique sanctions against Moscow in response to the invasion of Ukraine.
The astonishing increase in the ruble in the following months has provided fuel to 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. “They did not succeed. Of course it did not happen.”
At the end of February, after the ruble’s first fall and four days after the invasion of Ukraine began on February 24, Russia more than doubled the country’s key interest rate to as much as 20% from the previous 9.5%. Since then, the currency’s value has improved to the point that it has lowered interest rates three times to reach 11% at the end of May.
In fact, the ruble has become so strong that Russia’s central bank is actively pursuing measures to try to weaken it, fearing that this will make its exports less competitive.
But what is really behind the currency rise, and can it be maintained?
Russia generates record oil and gas revenues
The reasons are, to put it simply: strikingly high energy prices, capital controls and sanctions in themselves.
Russia is the world’s largest exporter of gas and the second largest exporter of oil. Its primary customer? The European Union, which has bought Russian energy for billions of dollars a week, while at the same time trying to punish it with sanctions.
It has put the EU in a difficult 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 Brent oil prices 60% higher than they were this time last year, even though many Western countries have limited their Russian oil purchases, Moscow still earns record profits.
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 grave of the unknown soldier at the Kremlin wall in Moscow, Russia, June. 22, 2022.
Mikhail Metzel Sputnik Reuters
During the first 100 days of the Russia-Ukraine war, the Russian Federation raised $ 98 billion in revenue from fossil fuel exports, according to the 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 dependence on Russian energy imports, this process could take years – by 2020, the bloc in Russia would be proud of 41% of gas imports and 36% of oil imports, according to Eurostat.
Yes, the EU adopted a landmark sanctions package in May that partially banned the import of Russian oil by the end of this year, but it had significant exemptions for oil delivered via pipeline, since 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 is making a record surplus on its foreign exchange operating balance,” Max Hess, a fellow at the Foreign Policy Research Institute, told CNBC. These revenues are mostly in dollars and euros via a complex ruble exchange mechanism.
“Even if Russia can sell a little less to the West right now, as the West goes over to cut off [reliance on Russia], they still sell a ton at all-time high oil and gas prices. So this gives a big surplus on the operating balance. ”
Russia’s current account surplus from January to May this year was in excess of $ 110 billion, according to Russia’s central bank – more than 3.5 times the amount from that period last year.
Strict capital controls
Capital controls – or the government’s restriction of foreign currency leaving the country – have played a big role here, plus the simple fact that Russia can no longer import so much thanks to sanctions, which means they spend less of their money on buying things from elsewhere .
“The authorities implemented fairly strict capital controls as soon as the sanctions came,” said Nick Stadtmiller, director of emerging markets 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 eased some of its capital controls and lowered interest rates in an attempt to weaken the ruble, as a stronger currency actually damages the 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 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 these reserves to service 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 pretty much stronger, but it’s a result of crashed 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 not does.”
People are queuing near the exchange rates for euros and US dollars for ruble signs at the entrance to the exchange office on May 25, 2022 in Moscow, Russia. Russia moved closer to a default on Wednesday after the US Treasury Department issued an important exemption from sanctions.
Konstantin Zavrazhin | Getty pictures
“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, say analysts.
“The ruble strength is linked to a surplus in the overall balance of payments, which is much more driven by exogenous factors related to sanctions, commodity prices and policy measures than by long-term underlying macroeconomic trends and fundamentals,” said Themos Fiotakis, head of FX. research at Barclays.
Russia’s Ministry of Economy said in mid – May that it expects unemployment to reach almost 7% this year, and that a return to 2021 levels is unlikely until 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 the wake. Foreign investment has taken 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 Kremlin’s intervention, its inattention to the Russians’ well-being continues. Even Russia’s own statistics bureau, known for massaging numbers to reach the Kremlin’s goals, acknowledged that the number of Russians living in poverty rose from 12. [million] to 21 million people in the first quarter of 2022. “
Regarding whether the strength of the ruble can be maintained, Fiotakis said: “It is very uncertain and depends on how geopolitics develops and policies are adjusted.”