The Russian ruble wiped out nearly all of the losses suffered after Vladimir Putin invaded Ukraine as Moscow enforces draconian capital controls and bars most foreign traders from exiting their investments.
The currency’s rebound shows how Moscow managed to stave off the collapse of the country’s financial system, but at the cost of further isolating Russia from global finance and fueling a powerful economic setback.
In early March, the ruble plunged to 150 to the US dollar – losing almost half its value in less than a fortnight – after US and European sanctions cut Russia off from global payment systems and froze much of the war chest of more than 600 billion dollars. amassed by the country’s central bank. “As a result of our unprecedented sanctions, the ruble was almost immediately reduced to rubble,” President Joe Biden said during his visit to Poland last week.
Since then, the currency has rallied considerably and was trading at 81.7 to the dollar on Thursday, roughly the same level as on February 23, the day before Vladimir Putin sent his troops to Ukraine.
Oil and gas revenues have helped stabilize the ruble as exports continue to flow into Europe. But the tight restrictions introduced by Moscow to prop up the value of the ruble have been crucial to averting a deeper currency crisis, according to Oleg Vyugin, chairman of the Moscow Stock Exchange supervisory board and former central bank deputy governor.
“There was a moment at the beginning when the ruble fell sharply . . . as many citizens moved their money abroad,” Vyugin said. “But then an embargo on this was introduced and it became practically impossible to use dollars in the country or abroad.”
Russians have been banned from transferring money to their own foreign bank accounts, extracting more than $10,000 in international currencies in the next six months, or taking more than that amount out of the country in cash. Banks and brokers have also been temporarily banned from carrying out cash exchange transactions against dollars and euros.
The central bank also more than doubled interest rates to 20%, urging people to save their rubles rather than exchange them for foreign currency. The measure prevented a run on the banks and kept the Russian banking system intact. Foreigners were also banned from exiting local stocks, leaving their investments trapped.
“It’s so managed by the authorities that I don’t think these are levels that can be considered a reflection of the Russian economy or the effectiveness of the sanctions,” said Cristian Maggio, head of strategy for emerging markets portfolio at TD Securities. .
Foreign investors, many of whom are effectively trapped in possession of Russian assets, are unable to transact in this market, and banks outside Russia have largely stopped quoting dollar-ruble exchange rates, according to Maggio. “Offshore, that market just doesn’t exist,” he said.
Yet the sanctions have actually bolstered one of the traditional strengths of the Russian economy: its trade surplus. Soaring energy prices coupled with a sharp drop in imports created a “very strong trade balance and a huge foreign exchange surplus on the trade balance,” Vyugin said.
Oil sales account for about 30% of Russia’s tax revenue and the current rise in world prices “gives Russia the strongest terms of trade since ‘peak oil’ in 2008”, the economists from IIR Elina Ribakova and Robin Brooks. “So even though Russia is shipping less oil now due to Western sanctions, Putin is still getting plenty of hard currency inflows.”
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Ribakova predicted that Russia’s current account could likely reach $200-250 billion in 2022 from around $120 billion in 2021 due to a slump in imports combined with strong commodity exports. The revenue means Russia could replenish central bank reserves that have been frozen under sanctions in just over a year, she said.
Companies that earn revenue in foreign currency – mostly oil and gas exporters – have also been forced to exchange 80% of that revenue into roubles, thereby outsourcing the work of supporting the currency to the private sector.
Russia’s central bank spent a relatively modest $1.2 billion to prop up the ruble in the two business days following the invasion, and has not intervened in currency markets since then, according to its own data. Analysts also say Putin’s plan to force European gas buyers to pay in rubles could give the currency a boost.
Still, the relative strength of the currency could mask the profound damage the sanctions are expected to do to the Russian economy.
IIR’s Ribakova estimates Russia’s economic output will shrink 15% this year, wiping out a decade and a half of growth, as domestic demand slumps – with deeper contraction possible if there is further news sanctions on oil and gas exports.
More than 400 foreign companies have withdrawn from Russia, she said, many of them self-sanctioning by leaving the country even though sanctions do not strictly require them to do so.
“The exchange rate is part of a political effort to imply that sanctions don’t work,” said Timothy Ash, economist at BlueBay Asset Management. “But it’s not a real market. And wherever the ruble is trading today, tomorrow or next year, Putin has made Russia an international pariah.