The Russian one ruble coin and the Russian flag displayed on a screen are seen in this multiple exposure illustration photo taken in Krakow, Poland on March 8, 2022.
Jakub Porzycki | Nurfoto | Getty Images
The Russian ruble hit 52.3 per dollar on Wednesday, up approximately 1.3% from the previous day and its strongest level since May 2015.
That’s a world away from its drop to 139 per dollar in early March, when the US and European Union began imposing unprecedented sanctions on Moscow in response to the invasion of Ukraine.
The ruble’s impressive rise in the following months fueled the Kremlin as “proof” that Western sanctions are not working.
“The idea was clear: violently crush the Russian economy,” Russian President Vladimir Putin said last week at the International Economic Forum in St. Petersburg. “They didn’t succeed. Obviously, that didn’t happen.”
In late February, after the ruble’s initial fall and four days after the start of the February 24 invasion of Ukraine, Russia more than doubled the country’s interest rate to 20% from 9.5%. Since then, the currency’s value has improved to the point where it lowered the interest rate three times to reach 11% at the end of May.
In fact, the ruble has grown so strong that Russia’s central bank is taking steps to try to weaken it, fearing it will make its exports less competitive.
But what is really behind the currency’s rally, and can it be sustained?
Russia is raking in record oil and gas revenue
The reasons are, to put it simply: surprisingly high energy prices, capital controls and the sanctions themselves.
Russia is the world’s largest exporter of gas and the second largest exporter of oil. Your main customer? The European Union, which buys billions of dollars of Russian energy a week, while trying to punish it with sanctions.
This has put the EU in a difficult position – it has now sent exponentially more money to Russia in purchases of oil, gas and coal than it has sent to Ukraine in aid, which has helped fill the Kremlin’s war chest. And with Brent oil prices 60% higher than last year, even though many Western countries have reduced their purchases of Russian oil, Moscow is still making a record profit.
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 Russia-Ukraine war, the Russian Federation earned $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 those gains came from the EU, at around $60 billion.
And while many EU countries aim to reduce their dependence on Russian energy imports, that process could take years – in 2020, the bloc depended on Russia for 41% of its gas imports and 36% of its oil imports, according to Eurostat. .
Yes, the EU passed a historic sanctions package in May that partially bans Russian oil imports until the end of this year, but it had significant exceptions for oil delivered by pipeline as landlocked countries like Hungary and Slovenia could not access sources. alternative oil that are shipped by sea.
“The exchange rate you see for the ruble is there because Russia is running record foreign currency current account surpluses,” Max Hess, a fellow at the Foreign Policy Research Institute, told CNBC. This revenue is mainly in dollars and euros through a complex ruble exchange mechanism.
“While Russia may be selling a little less to the West now as the West moves to cut [reliance on Russia], they are still selling a ton of all-time high oil and gas prices. So this is bringing a big 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 value for that period last year.
Strict capital controls
Capital controls – or the government’s limiting foreign currency leaving their country – have played a big role here, apart from the simple fact that Russia can no longer import as much thanks to sanctions, which means it is spending less money buying things from other places. .
“The authorities implemented very strict capital controls as soon as the sanctions started,” said Nick Stadtmiller, director of emerging markets strategy at Medley Global Advisors in New York. “The result is that money is coming in 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 bill.
The ruble: really a ‘Potemkin fee’?
As Russia is now isolated from the SWIFT international banking system and barred from trading internationally in dollars and euros, it has essentially been left to trade with itself, Hess said. This means that while Russia has amassed a formidable volume of foreign reserves that bolster its domestic currency, it cannot use these reserves to meet its import needs thanks to sanctions.
The ruble exchange rate “is really a Potemkin 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,” he said. Hess.
In politics and economics, Potemkin refers to fake villages that were supposedly built to provide an illusion of prosperity to the Russian Empress Catherine the Great.
“So, yes, the ruble on paper is a little stronger, but that’s a result of falling imports, and what’s the point of accumulating foreign exchange reserves, but buying things from abroad that you need for your economy? And Russia can do not do it.”
People line up near the Euro and US Dollar rates to the ruble sign at the entrance of the exchange house on May 25, 2022 in Moscow, Russia. Russia approached a default on Wednesday after the US Treasury let a key sanctions waiver expire.
Konstantin Zavrazhin | Getty Images
“We should really be looking at the underlying issues in the Russian economy, including crater imports,” added Hess. “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 ruble’s strength mean that Russia’s economic fundamentals are solid and escaped 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 much more driven by exogenous factors linked to sanctions, commodity prices and policy measures than by underlying long-term macroeconomic trends and fundamentals,” said Themos Fiotakis. , head of FX. search on Barclays.
Russia’s Economy Ministry said in mid-May that it expects unemployment to hit nearly 7% this year and that 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, leaving large numbers of unemployed Russians in their wake. Foreign investment took a big hit, and poverty 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,” said Hess. “Although the ruble has soared thanks to Kremlin interference, its disregard for the well-being of Russians continues. Even Russia’s own statistics agency, famous for manipulating numbers to achieve Kremlin goals, has acknowledged that the number of Russians living in poverty rose from 12 [million] to 21 million people in the first quarter of 2022.”
As for sustaining the ruble’s strength, Fiotakis said: “It’s very uncertain and depends on how geopolitics evolves and politics adjusts.”