A 1 Russian ruble coin and a Russian flag are displayed on the screen in this multiple exposure illustration taken in Krakow, Poland on March 8, 2022.
Jacob Borzeki | Norfoto | Getty Images
The Russian ruble hit 52.3 against the dollar on Wednesday, up nearly 1.3% from the previous day and the strongest level since May 2015.
That’s a world away from dropping as low as 139 against the 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 astonishing appreciation of the ruble in the following months fueled the Kremlin as “proof” that Western sanctions were not working.
“The idea was clear: violently crush the Russian economy,” Russian President Vladimir Putin said last week during the annual Saint Petersburg International Economic Forum. “They didn’t work. It obviously didn’t happen.”
In late February, after the initial collapse of the ruble and four days after the start of the invasion of Ukraine on February 24, Russia has more than doubled the country’s main interests Massive rate to 20% from the previous 9.5%. Since then, the currency has improved so much that it has cut the interest rate three times, to 11%. in late May.
The ruble has in fact become so strong 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 currency’s rally, and can it continue?
Russia reaps record oil and gas revenues
The reasons, simply put, are: strikingly high energy prices, capital controls, and the penalties themselves.
Russia is The largest gas exporter in the world and the The second largest oil exporter. Its primary client? The European Union, which has been buying billions of dollars’ worth of Russian energy every week while simultaneously trying to punish Russia for it.
This put the European Union in an awkward position – it now sent twice as much money to Russia in oil, gas and coal purchases than it did to Ukraine as aid, helping to fill the Kremlin’s war fund. and with Brent crude Prices are 60% higher than this time last year, and although many Western countries have limited their purchases 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 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.
Michael Metzel | Sputnik | Reuters
In the first 100 days of the Russo-Ukrainian War, the Russian Federation earned $98 billion in revenue from fossil fuel exports, to me Energy and Clean Air Research Center, a Finland-based research organization. More than half of those gains came from the European Union, about $60 billion.
And while many EU countries are intent on reducing their dependence on Russian energy imports, this process could take years — in 2020, the union relied on Russia for 41% of its gas imports and 36% of its oil imports, according to Eurostat.
yes The European Union passed a historic sanctions package in May It partially banned imports of Russian oil by the end of this year, but had significant exceptions for pipeline-delivered oil, since landlocked nations such as Hungary and Slovenia did not have access to alternative oil sources shipped by sea.
“The exchange rate you see for the ruble is there because Russia is running record current-account surpluses of foreign currencies,” Max Hess, a fellow at CNBC’s Foreign Policy Research Institute, told CNBC. This revenue is mostly in dollars and euros through a complex ruble swap mechanism.
“Although Russia may sell a little to the West at the moment, the West is going to block the way [reliance on Russia]They are still selling a ton at the all-time high oil and gas prices. So this brings a large current account surplus.”
Russia’s current account surplus from January to May of this year was just over $110 billion, according to the Central Bank of Russia – More than 3.5 times the amount in that period last year.
Strict capital controls
Capital controls – or the government’s restriction of foreign currency leaving its country – has played a big role here, plus the fact that Russia can’t import any more thanks to sanctions means it spends less of its money buying things elsewhere. .
It’s really Potemkin’s rate, because sending money from Russia abroad due to sanctions – both on Russian individuals and on Russian banks – is very difficult.
Max Hess
Fellow of the Institute for Foreign Policy Research
“The authorities implemented very strict capital controls as soon as the sanctions came in,” said Nick Stadmiller, director of emerging markets strategy at Medley Global Advisors in New York. “The result is an influx of money 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 lowered the interest rate in an attempt to weaken the ruble, because a stronger currency is actually hurting its financial account.
The ruble: really the “potemkin price”?
Now that Russia is cut off from the international SWIFT banking system and barred from international trade in dollars and euros, Hess said, it was left to trade mainly with itself. This means that while Russia has accumulated a huge amount of foreign reserves that boost its currency at home, it cannot use these reserves to meet its import needs, thanks to the sanctions.
The ruble exchange rate is “really the Potemkin rate, because sending money abroad from Russia under sanctions – whether on Russian individuals or Russian banks – is very difficult, not to mention Russia’s capital controls,” Hess said.
In politics and economics, Potemkin refers to the fake villages allegedly constructed to provide the illusion of prosperity for the Russian Empress Catherine the Great.
“So, yes, the ruble on paper is a little stronger, but this is as a result of the collapse of imports, and what is the point of creating foreign exchange reserves, but to go and buy things from abroad that you need for your economy? And Russia can not do this. “
People line up near euro and US dollar rates to place a ruble sign at the entrance to an exchange office on May 25, 2022 in Moscow, Russia. Russia came close to defaulting on Wednesday after the US Treasury allowed a major sanctions waiver to expire.
Konstantin Zavrazin | Getty Images
“We should really look at the fundamental issues in the Russian economy, including bloated 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 actual Russian economy?
Does the ruble’s strength mean that Russia’s economic fundamentals are sound and have weathered 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 more by external factors related to sanctions, commodity prices and policy actions than to basic long-term macroeconomic trends and fundamentals,” said Themos Phyotakis, Head of FX. Search in Barclays.
The Russian Ministry of Economy said in mid-May It expects unemployment to reach nearly 7%. This year, and that a return to 2021 levels is unlikely until 2025 at the earliest.
Since the outbreak of the Russian war in Ukraine, thousands of global companies have left Russia, leaving behind huge numbers of Russian unemployed. Foreign investment took a huge blow, and Poverty nearly 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 risen thanks to the Kremlin’s intervention, its disinterest in the well-being of Russians continues. Even the Russian Statistical Agency, famous for compiling numbers to achieve the Kremlin’s goals, I admit it The number of Russians living in poverty increased from 12 [million] to 21 million people in the first quarter of 2022.”
Regarding the possibility of the ruble continuing to strengthen, Viotakis said, “It is uncertain and depends on how geopolitics develops and policy adapts.”
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