A Russian one ruble coin and a Russian flag are seen on a screen in this multiple exposure illustrative photo taken on March 8, 2022 in Kraków, Poland.
Jakub Porzycki | Nurphoto | Getty Images
The Russian ruble hit 52.3 against the dollar on Wednesday, up around 1.3% from the previous day and the strongest level since May 2015.
That’s a world away from its plunge to $139 in early March, when the US and European Union began imposing unprecedented sanctions on Moscow in response to its invasion of Ukraine.
The ruble’s staggering rise in the months that followed has buoyed the Kremlin as “proof” that Western sanctions aren’t working.
“The idea was clear: to violently smash the Russian economy,” Russian President Vladimir Putin said last week during the annual International Economic Forum in St. Petersburg. “They didn’t succeed. Obviously that didn’t happen.”
In late February, after the ruble’s initial plunge and four days after it began its invasion of Ukraine on February 24, Russia more than doubled the country’s benchmark interest rate to a whopping 20% from a previous 9.5%. Since then, the currency’s value has improved enough that the interest rate has been cut three times to reach 11% at the end of May.
In fact, the ruble has become so strong that the Russian central bank is taking active measures to try to weaken it, fearing that this will make its exports less competitive.
But what’s really behind the currency’s rise, and can it last?
Russia achieves record revenues from oil and gas
Put simply, the reasons are strikingly high energy prices, capital controls and sanctions themselves.
Russia is the world’s largest exporter of gas and the second largest exporter of oil. His main customer? The European Union, which buys billions of dollars worth of Russian energy every week while trying to punish them with sanctions.
This has put the EU in a difficult position – it has now sent exponentially more money to Russia for 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, Moscow is still making record profits even though many Western countries have curbed their Russian oil purchases.
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 at the Kremlin Wall in Moscow, Russia. June 22nd, 2022.
Mikhail Metzel | Sputnik | Reuters
In the first 100 days of the Russo-Ukrainian war, the Russian Federation made $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 that revenue came from the EU, about $60 billion.
And while many EU countries intend to reduce their dependence on Russian energy imports, that process could take years — in 2020, the bloc relied on Russia for 41% of its gas imports and 36% of its oil imports, according to Eurostat.
Yes, the EU passed a landmark sanctions package in May that partially bans imports of Russian oil until the end of this year, but there have been significant exemptions for oil delivered by pipeline as landlocked countries like Hungary and Slovenia lack access to alternative sources of oil had be sent by sea.
“This exchange rate that you see for the ruble is there because Russia is running record foreign exchange current account surpluses,” Max Hess, a fellow at the Foreign Policy Research Institute, told CNBC. This income is mainly generated in dollars and euros through a complex ruble swap mechanism.
“Although Russia may be selling a little less to the West at the moment as the West moves towards cutting off [reliance on Russia], they’re still selling a ton at oil and gas prices at all-time highs. So that brings a large current account surplus.”
Russia’s current account surplus from January to May this year was just over $110 billion, according to the Central Bank of Russia — more than 3.5 times the amount in the same period last year.
Strict capital controls
Capital controls – or government limits on foreign exchange outflows – have played a big part here, plus the simple fact that sanctions have restricted Russia from importing as much, meaning it’s spending less of its money to get around to buy things from elsewhere.
“The authorities implemented quite 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 in from exports while there are relatively few capital outflows. The net effect of all this is a stronger ruble.”
Russia has now eased some of its capital controls and lowered its interest rate to weaken the ruble, as a stronger currency is actually hurting its budget account.
The ruble: really a “Potemkin rate”?
Now that Russia is cut off from the international SWIFT banking system and prevented from trading the dollar and euro internationally, it is essentially left to trade with itself, Hess said. This means that while Russia has built up a sizeable volume of foreign exchange reserves to support its currency domestically, sanctions prevent it from using those reserves to meet its import needs.
The ruble’s exchange rate “is really a Potemkin rate because, given the sanctions — on both Russian individuals and Russian banks — it’s incredibly difficult to send money abroad from Russia, let alone Russia’s own capital controls,” he said Hess.
In politics and economics, Potemkin refers to fake villages supposedly built to give the Russian Empress Catherine the Great an illusion of prosperity.
“So yes, the ruble is a bit stronger on paper, but that’s the result of the collapse in imports, and what’s the point of building foreign exchange reserves than buying things from abroad that you need for your economy?” And Russia can’t do that.”
People stand near euro and US dollar rates at the ruble board at the entrance of the exchange office on May 25, 2022 in Moscow, Russia. Russia neared a default on Wednesday after the U.S. Treasury Department expired a key exemption from sanctions.
Konstantin Zavrazhin | Getty Images
“We should really look at the underlying problems in the Russian economy, including skyrocketing imports,” Hess added. “Even if the ruble has a high value, it will have a devastating impact on the economy and the quality of life.”
Does this reflect the actual Russian economy?
Does the strength of the ruble mean that Russia’s economic fundamentals are sound and have escaped the blow of sanctions? Not so fast, analysts say.
“The strength of the ruble is associated with a surplus in the overall balance of payments, which is driven much more by exogenous factors related to sanctions, commodity prices and policy measures than by longer-term underlying macroeconomic trends and fundamentals,” 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 that a return to 2021 levels is unlikely until 2025 at the earliest.
Since the start of the Russian war in Ukraine, thousands of international companies have left Russia, leaving large numbers of Russians unemployed. Foreign investment has taken a massive hit and poverty has 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. “While the ruble has surged thanks to Kremlin meddling, its inattention to Russia’s well-being remains. Even Russia’s own statistics agency, known for massaging numbers to meet the Kremlin’s targets, acknowledged that the number of Russians living in poverty has risen from 12 [million] to 21 million people in the first quarter of 2022.”
Whether the ruble’s strength can be maintained, Fiotakis said: “It is very uncertain and depends on how geopolitics develops and politics adapts.”