The Russian ruble reached its strongest level in 7 years despite the sanctions

A Russian ruble coin and a Russian flag are displayed on screen in this multi-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 to 139 against the dollar in early March, when the United States and the European Union began imposing unprecedented sanctions on Moscow in response to the invasion of Ukraine.

The sudden appreciation of the ruble in the following months fed 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 St. 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 more than doubled the country’s main interests 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%. At the end of May.

In fact, the ruble has become so strong that the Russian Central Bank is taking active steps to try to weaken it, fearing that this will make its exports less competitive.

But what really lies behind the currency’s rally, and can it continue?

The reasons, simplified, are: a sudden rise in energy prices, capital controls and the penalties themselves.

Russia is the world’s largest gas exporter and the second largest oil exporter. Your main customer? And the European Union, which was buying billions of dollars in Russian energy every week, was trying to punish Russia for doing so.

This has put the European Union in an awkward position – it has now sent twice the money it sent to Russia in its purchases of oil, gas and coal as aid to Ukraine, helping to fill the Kremlin’s war fund. And with Brent oil prices up 60% from a year ago, and while 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 start 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, on June 22. , 2022.

Michael Metzel | Sputnik | Reuters

In the first 100 days of the Russo-Ukrainian war, the Russian Federation took $98 billion in revenue from fossil fuel exports, according to me, the Center for Research on Energy and Clean Air, a Finland-based research organization. More than half of those gains came from the European Union, about $60 billion.

And while many EU countries aim to reduce 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 landmark sanctions package in May, it partially banned Russian oil imports until the end of this year, but it had big exceptions for pipeline-delivered oil, as landlocked countries like Hungary and Slovenia did not have access to Alternative sources of oil shipped by sea.

“The 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 CNBC’s Foreign Policy Research Institute, told CNBC. This revenue comes mainly in dollars and euros through a complex ruble exchange mechanism.

While Russia may sell some to the West for now, the West will get in the way [reliance on Russia]They are still selling a ton at the highest oil and gas prices ever. This brings a large current account surplus.”

Russia’s current account surplus from January to May this year amounted to just over $110 billion, according to the Central Bank of Russia — more than 3.5 times the amount in that period last year.

Capital controls – or government restrictions on the flow of foreign currency from your country – played a big role here, plus the fact that Russia can’t import more thanks to sanctions means it spends less money buying things elsewhere. .

It’s really Potemkin’s fee, because sending money from Russia abroad due to sanctions – both for Russian individuals and for Russian banks – is very difficult.

Max Hess

Member of the Foreign Policy Research Institute

“The authorities have implemented very strict capital controls once sanctions are in place,” said Nick Stadmiller, director of emerging markets strategy at Medley Global Advisors in New York. The result is an inflow of cash from exports while there is relatively little inflow of capital. The net effect of all this is the ruble is stronger.”

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.

Now that Russia is cut off from the SWIFT international banking system and banned from doing international trade in dollars and euros, Hess said it still has to trade mainly with itself. This means that while Russia has amassed a huge amount of foreign reserves that boost its currency at home, it cannot use these reserves to meet import needs thanks to sanctions.

The ruble exchange rate is “really Potemkin’s, because sending money abroad from sanctioned Russia – whether to 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 supposedly built 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 a collapse in imports, and what is the point of creating foreign exchange reserves, but going to buy things from abroad that you need for your economy? And Russia can’t do that. “

People line up near euro and US dollar rates to place a ruble sign at the entrance to a money exchange 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 of the Russian economy, including bloated imports,” Hess added. “Even if the ruble says it has a high value, it will have a devastating effect on the economy and quality of life.”

Does the ruble’s strength mean that Russia’s economic foundations are strong and have withstood 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 linked to sanctions, commodity prices and policy actions than by long-term underlying macroeconomic trends and fundamentals,” said Themus Phyotakis, head of the exchange. . Barclays Research.

The Russian Ministry of Economy said in mid-May that unemployment is expected to reach nearly 7%. This year, 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 a large number of unemployed Russians. Foreign investment took a huge 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. Despite the appreciation of the ruble thanks to the Kremlin’s intervention, his indifference to the well-being of Russians persists. Even the Russian Statistical Agency, famous for compiling numbers to achieve the Kremlin’s goals, admit that the number of Russians living in poverty has increased by 12 [million] to 21 million people in the first quarter of 2022.”

On whether the ruble will continue to recover, Viotakis said: “It is uncertain and depends on how geopolitics develops and policy adapts.”

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