As sanctions from the West piled up, the Russian currency fell to record lows against the US dollar. Much of the foreign exchange reserves held by the Russian Central Bank were frozen, and rating agencies lowered Russia’s credit rating to “junk bond” status. In early March, the ruble suffered its biggest drop, more than 33 percent against the dollar.
Since then, the ruble has recovered and is now trading at levels close to those seen before the Russian invasion, a sign that the initial impact of the sanctions – some of the harshest in history – may be fading.
The rise in the Russian currency can be partially explained by the enhanced financial situation in which Russia finds itself, thanks to a significant increase in gas export revenues, as well as a significant decrease in imports.
according to Bloomberg EconomicsRussia is expected to earn about $321,000 million (about €292,000 million) from its energy exports in 2022, a third more than it achieved in 2021, if its major customers, including the European Union, continue to buy oil. and Russian gas.
According to observers, another factor that may explain the ruble’s recovery is that it is being artificially supported by the Russian Central Bank through its capital controls.
“The fluctuations in the Russian currency do not reflect the fundamentals of the Russian economy. Most of the time these fundamentals are reflected in the currency. But once you put capital controls in place, that picture fades,” he told DW Craig Erlam. Senior Market Analyst at OANDA.
“There is no way to know if the Russian economy is now facing the same scenario that it faced in mid-February, before the invasion of Ukraine, even if the ruble appears to be indicating that,” he told DW.
Although the International Monetary Fund predicted in January that the Russian economy would grow by 2.8 percent this year, it is now expected to decline by 10 to 15 percent.
Facade of the Central Bank of Russia in Moscow.
Industrial boost to the ruble
With the ruble sank in the wake of the invasion and Western sanctions that followed, the Russian Central Bank stepped in as a fire extinguisher to save the falling currency. In an effort to save him, the financial institution doubled the benchmark interest rate to 20 percent, restricted local businesses’ access to foreign currency and placed limits on foreign currency withdrawals. It has also taken steps to prevent the flight of dollars, including preventing investors from dumping Russian stocks and bonds.
The ruble got another big boost when Russian President Vladimir Putin demanded that “enemy” countries pay for Russian gas in rubles rather than euros or dollars.
But Putin later reversed his initial position to allow foreign buyers to continue paying in foreign currency, but only after opening special accounts at Russia’s Gazprom Bank, which converts those payments into rubles.
“In fact, it only artificially supports the ruble, while it seems to force buyers in hostile countries to use that currency,” Erlam explained. “This is similar to the measures that have already been imposed on Gazprom, and other Russian banks, in terms of forcing them to convert 80% of their foreign currency payments into rubles. This also supports such desperate measures.”
The ruble feeds on “a lot of manipulation”
The US Secretary of State, Anthony Blinken, said that the return of the ruble was fueled by “a lot of manipulation”. “People are forbidden to extract money in the ruble, thereby artificially supporting its value. This is not sustainable. I think this change will be noticed,” Blinken told NBC on Sunday (04.03.2022).
The ruble’s trading volumes have decreased due to the sanctions, and many brokers and speculators remain wary of trading the currency.
But despite this recent rally, the long-term outlook for the ruble looks less positive. The Russian currency – which has weakened significantly against the dollar over the past two decades – is expected to continue to struggle to come back as the West seeks to move away quickly from Russian oil and gas, the lifeblood of Moscow’s economy.