The Russian one ruble coin and the Russian flag displayed on a screen can be seen in this multiple exposure photo taken in Krakow, Poland on March 8, 2022.
Jakub Porzycki | Nurfoto | Getty Images
The Russian ruble hit 52.3 against the dollar on Wednesday, up about 1.3% from the previous day and the highest level since May 2015.
That’s a world away from its plunge to $139 in early March, when the US and European Union began rolling out unprecedented sanctions against Moscow in response to the invasion of Ukraine.
The ruble’s staggering rise in the following months has fueled the Kremlin as “proof” that Western sanctions are not working.
“The idea was clear: crush the Russian economy by force,” Russian President Vladimir Putin said at the annual St. Petersburg International Economic Forum last week. “They didn’t succeed. Of course that didn’t happen.”
In late February, after the ruble’s first fall and four days after the invasion of Ukraine began on February 24, Russia doubled the country’s key interest rate to a staggering 20%, from 9.5% earlier. Since then, the value of the currency has improved to such an extent that interest rates have been cut three times to reach 11% by the end of May.
In fact, the ruble has become so strong that the Russian central bank is actively taking measures to weaken the ruble, fearing that this will make their exports less competitive.
But what is really behind the currency’s rise and can it be sustained?
Russia brings in record revenues from oil and gas
The reasons are, to put it simply: remarkably high energy prices, capital controls 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 up billions of dollars of Russian energy every week and at the same time tries to punish it with sanctions.
That has put the EU in a tricky spot – it has now sent exponentially more money to Russia for oil, gas and coal purchases than Ukraine in aid, helping to fill the Kremlin’s war chest. And with the price of Brent oil 60% higher than this time last year, Moscow is still making record profits, even as many Western countries have restricted their Russian oil purchases.
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 war between Russia and Ukraine, the Russian Federation brought in $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 that revenue came from the EU, about $60 billion.
And while many EU countries plan to reduce their reliance on Russian energy imports, this process could take years – in 2020, according to Eurostat, the bloc relied on Russia for 41% of its gas imports and 36% of its oil imports.
Yes, the EU approved a landmark sanctions package in May that partially banned Russian oil imports by the end of this year, but there were significant exceptions for oil delivered through pipelines, as landlocked countries such as Hungary and Slovenia did not had access to alternative oil wells shipped by sea.
“That exchange rate you see for the ruble is there because Russia is earning record foreign exchange current account surpluses,” Max Hess, a fellow at the Foreign Policy Research Institute, told CNBC. Those earnings are usually in dollars and euros through a complex ruble swap mechanism.
“While Russia may be selling a little less to the West right now, as the West cuts off, [reliance on Russia], they still sell a ton at consistently high oil and gas prices. This results in a large current account surplus.”
Russia’s current account surplus was just over $110 billion from January to May this year, according to the Bank of Russia, more than 3.5 times the amount for that period last year.
Strict capital controls
Capital controls – or the government’s restriction on foreign exchange leaving its country – have played a big part here, plus the simple fact that Russia can’t import as much thanks to sanctions, meaning it spends less money buying stuff from elsewhere .
“Authorities have put in place pretty strict capital controls once sanctions came in,” said Nick Stadtmiller, director of emerging markets strategy at Medley Global Advisors in New York. “As a result, money is pouring in from exports while there is relatively little capital outflow. The net effect of all this is a stronger ruble.”
Russia has now loosened some of its capital controls and cut its interest rate in an attempt to weaken the ruble, as a stronger currency hurts its fiscal bill.
The ruble: really a ‘Potemkin rate’?
Because Russia is now cut off from the international SWIFT banking system and blocked from international trade in dollars and euros, it essentially has to trade with itself, Hess said. That means that while Russia has built up a formidable volume of foreign reserves that bolster its currency domestically, it can’t use those reserves to meet its import needs, thanks to sanctions.
The exchange rate of the ruble “is in fact a Potemkin exchange rate, because in view of the sanctions — both for Russian individuals and Russian banks — sending money abroad from Russia is incredibly difficult, not to mention its own capital controls. of Russia,” Hess said.
In politics and economics, Potemkin refers to fake villages that were supposedly built to give the Russian Empress Catherine the Great an illusion of prosperity.
“So yes, the ruble is a lot stronger on paper, but that’s the result of a crash of imports, and what’s the point of building up forex reserves other than buying stuff from abroad that you need for your economy? And Russia can’t do that.”
People queue at the exchange rates of Euro and US dollars at the ruble board at the entrance to the exchange office on May 25, 2022 in Moscow, Russia. Russia moved closer to default on Wednesday after the US Treasury Department dropped a key sanctions waiver.
Konstantin Zavrazhin | Getty Images
“We really should 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 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 escaping sanctions? Not so fast, analysts say.
“The strength of the ruble is linked to a surplus in the total balance of payments, which is driven much more by exogenous factors related to sanctions, commodity prices and policy measures than by underlying macroeconomic trends and longer-term fundamentals,” said Themos Fiotakis , head of FX. research at Barclays.
Russia’s economy ministry said in mid-May it expects unemployment to reach nearly 7% this year, and 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, resulting in a large number of unemployed Russians. Foreign investment has taken a huge hit and poverty has nearly doubled in just 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 risen thanks to Kremlin interference, Russia’s oversight for Russia’s well-being persists. Even Russia’s own statistics agency, famous for massaging numbers to achieve 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 to whether the ruble’s strength can be sustained, Fiotakis said: “It is very uncertain and depends on how geopolitics evolves and policies adapt.”