The Russian one ruble coin and the Russian flag displayed on a screen are seen in this multiple exposure photo illustration taken in Krakow, Poland, on March 8, 2022.
Jakub Porzycki | Nurfoto | fake images
The Russian ruble hit 52.3 per dollar on Wednesday, up about 1.3% from a day earlier and its strongest level since May 2015.
That is a world away from its plunge to 139 per dollar in early March, when the United States and the European Union began rolling out unprecedented sanctions against Moscow in response to its invasion of Ukraine.
The impressive rise of the ruble in the following months has given the Kremlin wings as “proof” that Western sanctions are not working.
“The idea was clear: violently crush the Russian economy,” Russian President Vladimir Putin said last week during the annual International Economic Forum in St. Petersburg. “They weren’t successful. Obviously, that didn’t happen.”
In late February, after the initial fall in 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 whopping 20% from 9.5 % previous. Since then, the currency’s value has improved to the point that it lowered the interest rate 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 taking steps to try to weaken it, fearing this will make its exports less competitive.
But what is really behind the currency’s rise? Can it hold?
Russia is racking up record oil and gas revenue
The reasons are, in a nutshell: shockingly high energy prices, capital controls, and sanctions themselves.
Russia is the world’s largest gas exporter and the second largest oil exporter. Your main client? The European Union, which has been buying billions of dollars worth of Russian energy every week while trying to punish it with sanctions.
That has put the EU in an awkward spot: It has now sent exponentially more money to Russia in oil, gas and coal purchases than it has sent to Ukraine in aid, which has helped fill the Kremlin’s war chest. And with Brent crude prices 60% higher than this time last year, even though many Western countries have cut 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 anniversary of the start of the Great Patriotic War against Nazi Germany in 1941, at the Soldier’s Tomb Unknown next to 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 collected $98 billion in revenue from fossil fuel exports, according to the Center for Research on Energy and Clean Air, a Finland-based research organization. More than half of those gains came from the EU, about $60 billion.
And although 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 gas imports and 36% of its imports. of oil, according to Eurostat.
Yes, the EU passed a landmark package of sanctions in May that partially banned Russian oil imports by the end of this year, but it had significant exceptions for oil delivered by pipeline, as landlocked countries like Hungary and Slovenia couldn’t access alternative sources of oil 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 currency,” Max Hess, a fellow at the Foreign Policy Research Institute, told CNBC. Those revenues are mainly in dollars and euros through a complex ruble exchange mechanism.
“Although Russia may be selling a little less to the West at the moment, as the West is moving to cut [reliance on Russia], are still selling a ton at the highest oil and gas prices of all time. So this is creating a large 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 for that period last year.
Strict capital controls
Capital controls, or the government’s capping of foreign exchange going out of its country, have played a big part here, in addition to the simple fact that Russia can’t import as much anymore thanks to sanctions, which means it’s spending less of your money buying things from other places. .
“The authorities put in place fairly strict capital controls as soon as the sanctions were imposed,” said Nick Stadtmiller, director of emerging markets strategy at Medley Global Advisors in New York. “The result is that money flows from exports while there are relatively few capital outflows. The net effect of all this is a stronger ruble.”
Russia has now relaxed 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 ruble: really a ‘Potemkin tax’?
Because Russia is now cut off from the SWIFT international banking system and cannot trade internationally in dollars and euros, it has essentially been left to trade with itself, Hess said. That means that while Russia has amassed a formidable volume of foreign reserves that bolster its local currency, it can’t use those reserves to meet its import needs, thanks to sanctions.
The ruble exchange rate “is really a Potemkin exchange rate, because sending money from Russia abroad given the sanctions, both on 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 fake towns that were supposedly built to provide an illusion of prosperity for the Russian Empress Catherine the Great.
“So yes, the ruble on paper is a bit stronger, but that’s a result of falling imports, and what’s the point of accumulating foreign exchange reserves, if not to go and buy things abroad that you need? for your economy? And Russia can’t do that.”
People line up near the euro and US dollar exchange rates to the ruble sign 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 let a key sanctions waiver expire.
Konstantin Zavrakhin | fake images
“We really should be looking at the underlying problems in the Russian economy, including imports that are sinking,” Hess added. “Even if the ruble says it has a high value, that 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 solid and have escaped the blow of sanctions? Not so fast, analysts say.
“The strength of the ruble is linked to a surplus in the general balance of payments, which is much more driven by exogenous factors linked to sanctions, commodity prices and policy measures than by underlying macroeconomic trends and 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 is unlikely to return to 2021 levels until 2025 at the earliest.
Since Russia’s war in Ukraine began, thousands of international companies have left Russia, leaving large numbers of unemployed Russians in their wake. Foreign investment has taken a massive hit and poverty nearly doubled in 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 Kremlin interference, its lack of attention to the welfare of Russians continues. Even Russia’s own statistics agency, famous for manipulating numbers to achieve Kremlin goals, acknowledged that the number of Russians living in poverty increased from 12 [million] to 21 million people in the first quarter of 2022”.
As for whether the ruble’s strength can be sustained, Fiotakis said: “It’s very uncertain and depends on how geopolitics evolves and policy adjusts.”