The Russian ruble is at its strongest level in the last 7 years, despite huge sanctions.  Here's why

The Russian ruble is at its strongest level in the last 7 years, despite huge sanctions. Here’s why

The Russian one-ruble coin and the Russian flag shown on the screen can be seen in this multi-exposure illustration taken in Krakow, Poland, on March 8, 2022.

Jakub Porzicki Nurphoto | Getty Images

The Russian ruble reached 52.3 against the dollar on Wednesday, which is an increase of approximately 1.3% compared to the previous day and the highest level since May 2015.

That is a world far from its fall to 139 per dollar in early March, when the United States and the European Union began imposing unprecedented sanctions on Moscow in response to its invasion of Ukraine.

The startling jump in the ruble in the coming months gave fuel to the Kremlin as “proof” that Western sanctions are not working.

“The idea was clear: to violently break the Russian economy,” Russian President Vladimir Putin said last week during the annual International Economic Forum in St. Petersburg. “They did not succeed. Apparently, that didn’t happen.

In late February, after the initial fall of the ruble and four days after the invasion of Ukraine began on February 24, Russia more than doubled the country’s key interest rate to a staggering 20% ​​from the previous 9.5%. Since then, the value of the currency has improved to the point that it has cut interest rates three times to 11% by the end of May.

The ruble has actually strengthened so much that the Russian central bank is actively taking measures to try to weaken it, fearing that this will make their exports less competitive.

But what is really behind the growth of the currency and can it be sustained?

Russia has record oil and gas revenues

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

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

That put the EU in an awkward position – it has now sent exponentially more money to Russia to buy oil, gas and coal than it has sent to Ukraine as aid, which has helped fill the Kremlin’s coffin. And with Brent oil prices 60% higher than at this time last year, although many Western countries have curbed the purchase of Russian oil, Moscow is still making record profits.

Russian President Vladimir Putin and Defense Minister Sergei Shoigu attend 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 next to the Kremlin Wall in Moscow, Russia, June. 22, 2022.

Mikhail Metzel Sputnik | Reuters

In the first 100 days of the war between Russia and Ukraine, the Russian Federation earned $ 98 billion in revenues from fossil fuel exports, according to the Center for Energy and Clean Air Research, a research organization based in Finland. More than half of that revenue comes from the EU, about $ 60 billion.

While many EU countries intend to reduce their reliance on Russian energy imports, the process could take years – in 2020 the bloc relied on Russia for 41% of its gas imports and 36% of its oil imports, according to Eurostat.

Yes, the EU adopted a significant package of sanctions in May that partially bans Russian oil imports by the end of this year, but had significant exceptions for oil supplied through the pipeline, as landlocked countries like Hungary and Slovenia could not access alternative sources. oil. are delivered by sea.

“The exchange rate you see for the ruble exists because Russia earns record current account surpluses in foreign currency,” Max Hess, an associate at the Institute for Foreign Policy, told CNBC. That income is mostly in dollars and euros through a complex mechanism of exchange of rubles.

“Although Russia may be selling a little less to the West at the moment, the West is moving to cut it off [reliance on Russia], they continue to sell a ton at forever high oil and gas prices. So this brings a big surplus on the current account. ”

Russia’s surplus on the current account from January to May this year amounted to slightly more than 110 billion dollars, according to the data of the Russian Central Bank, which is more than 3.5 times more than in that period last year.

Strict control of capital

Capital control – or the government’s restriction on foreign money leaving its country – has played a big role, plus the simple fact that Russia can no longer import thanks to sanctions, which means it spends less of its money buying things elsewhere.

That is really Potemkin’s rate, because sending money from Russia abroad, given the sanctions – both to Russian individuals and Russian banks – is incredibly difficult.

Mak Hess

Associate, Institute of Foreign Policy

“The authorities conducted a fairly strict capital control as soon as the sanctions came,” said Nick Stadtmiler, director of emerging markets strategy at Medley Global Advisors in New York. “The result is an inflow of money from exports, while there is relatively little outflow of capital. The net effect of all this is stronger laundry. “

Russia has now eased some of its capital controls and cut interest rates in an attempt to weaken the ruble, as a stronger currency is actually hurting its fiscal account.

Ruble: really ‘tomekin’s foot’?

“Since Russia is now cut off from the international banking system SWIFT and blocked from international trade in dollars and euros, it is left to essentially trade with itself,” Hess said. This means that, although Russia has built a huge amount of foreign exchange reserves that strengthen its currency at home, it cannot use those reserves to meet its import needs, thanks to sanctions.

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

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

“So, yes, the ruble is much stronger on paper, but that is the result of falling imports, and what is the purpose of accumulating foreign exchange reserves, than to go and buy things from abroad that you need for your economy?” And Russia may not do that. “

People stand in line next to the exchange rates of euros and US dollars on the signboard of the ruble at the entrance to the exchange office on May 25, 2022 in Moscow, Russia. Russia came close to default on Wednesday after the US Treasury Department allowed a key exemption from sanctions to expire.

Konstantin Zavrazhin Getty Images

“We should really look at the basic issues in the Russian economy, including the import of craters,” Hess added. “Even if the ruble says it has a high value, it will have a devastating impact on the economy and quality of life.”

Does this reflect the real Russian economy?

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

“The strength of the ruble is linked to the surplus in the overall balance of payments, which is much more driven by exogenous factors related to sanctions, commodity prices and policy measures than long-term underlying macroeconomic trends and fundamentals,” said Temos Fiotakis. research in Barclais.

Russia’s Ministry of Economy announced in mid-May that it expects unemployment to reach almost 7% this year and that a return to the 2021 level in 2025 at the earliest is unlikely.

Since the Russian war in Ukraine began, thousands of international companies have left Russia, leaving a huge number of unemployed Russians behind. Foreign investment has suffered a huge blow, and poverty has almost doubled in the first five weeks of the war, 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 grown thanks to the Kremlin’s interference, its negligence for the benefit of Russia continues. Even the Russian statistics agency, known for massaging numbers to meet the Kremlin’s goals, acknowledged that the number of Russians living in poverty has risen from 12 [million] to 21 million people in the first quarter of 2022.

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

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