Russia’s ruble is at its strongest level in 7 years despite heavy sanctions. why over here

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A Russian one ruble coin and the Russian flag displayed on a screen are seen in this multiple exposure illustrative photo taken on March 8, 2022 in Krakow, Poland.

Jacob Porziki | Nurphoto | Getty Images

The Russian ruble rose to 52.3 against the dollar on Wednesday, up nearly 1.3% on the previous day and the strongest since May 2015.

The world is far from falling to $139 in early March as the US and European Union began slapping unprecedented sanctions on Moscow in response to its invasion of Ukraine.

The surprising rise in the ruble in the months that followed has fueled the Kremlin as “proof” that Western sanctions are not working.

“The idea was clear: crack down on the Russian economy by force,” Russian President Vladimir Putin said last week during the annual International Economic Forum in St. Petersburg. “They didn’t succeed. Obviously not.”

In late February, four days after the ruble initially fell and it began invading Ukraine on February 24, Russia doubled the country’s policy rate to 20% from a previous 9.5%. Since then, the currency’s value has appreciated so much that the interest rate was cut three times to 11% at the end of May.

In fact, the ruble has become so strong that the Russian central bank is actively trying to weaken it, fearing it will make its exports less competitive.

But what is really behind the currency’s rise and can it last?

Russia is growing with record oil and gas revenues

Put simply, the reasons are: surprisingly high energy prices, capital controls, and the restrictions 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, is also trying to punish them with sanctions.

This has put the EU in an awkward position – it has now sent increasing amounts of money to Russia for oil, gas and coal purchases as aid to Ukraine, which has helped to bolster the Kremlin’s war chest. Is. And Brent crude prices are up 60% year-on-year, even though many Western countries are cutting back on their Russian oil purchases and Moscow is still making record profits.

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. 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 European Union for about $60 billion.

And although many EU countries aim to reduce their dependency on Russian energy imports, the process could take years – in 2020 the bloc relies on Russia for 41% of its gas imports and 36% of its oil imports. was according to Eurostat.

Yes, the European Union passed a historic sanctions package in May that partially bans Russian oil imports until the end of the year, but there have been significant exceptions for oil delivered by pipeline, for example from countries like Hungary and Slovenia. The besieged countries had no access to alternative sources of oil. Shipping by sea.

“The exchange rate you see for the ruble is because Russia is running a record foreign-currency current account surplus,” 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 is selling a little short to the West at the moment as the West moves towards cutback [reliance on Russia], they still sell a ton of oil and gas at high prices. So it brings a huge current account surplus.”

According to the Central Bank of Russia, Russia’s current account surplus from January to May this year was more than $110 billion — more than 3.5 times the amount from the same period last year.

strict capital controls

Capital controls – i.e. the government’s limitation of the outflow of foreign exchange – played a major role here, as did the simple fact that Russia can no longer import thanks to sanctions and can therefore not keep up with its country. Spending less means buying things elsewhere. ,

This is actually a Potemkin course as it is incredibly difficult for both Russian individuals and Russian banks to send money abroad from Russia given the restrictions.

Max Hayes

Fellow, Foreign Policy Research Institute

“As soon as the sanctions were imposed, the authorities implemented very strict capital controls,” said Nick Stadmiller, director of emerging markets strategy at Medley Global Advisors in New York. “The result is that money is coming in from exports while there is relatively little capital outflow. 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 actually hurts its financial balance.

Ruble: Really a “Potemkin course”?

Now that Russia is cut off from the international SWIFT banking system and prevented from doing business internationally in dollars and euros, it is essentially left to trade with itself, Hess said. This means that while Russia has accumulated a significant amount of foreign exchange reserves that strengthen its currency domestically, sanctions prevent it from using these reserves to meet its import needs.

The ruble’s exchange rate, Hess said, is “essentially a Potemkin rate because it’s incredibly difficult to send money from Russia abroad — both to Russian individuals and to Russian banks — not to mention Russia’s own capital controls.”

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 strong enough on paper, but that’s the result of import slumps, and what’s the point of building foreign exchange reserves than trying to buy things from abroad that you need for your economy?” And Russia taxes. Maybe you don’t.”

People queue near euro and US dollar rates at ruble signs at the entrance of an exchange office in Moscow, Russia, on May 25, 2022. Russia neared a default on Wednesday after the US Treasury Department ended a significant sanctions waiver.

Konstantin Zavrazin | Getty Images

“We should really look at the underlying problems in the Russian economy, including devastating imports,” Hayes said. “Even though the ruble is said to be valuable, it will have a devastating impact on the economy and quality of life.”

Does it reflect the real Russian economy?

Does the ruble’s strength mean Russia’s economic foundation is strong and has escaped the brunt 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 heavily driven by exogenous factors related to sanctions, commodity prices and policy measures,” said FX chief Thomas Fiotakis. Research at Barclays.

Russia’s economy ministry said in mid-May that it expects unemployment to reach about 7% this year and is unlikely to return to 2021 levels 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. According to Rosstat, Russia’s federal statistics agency, foreign investment has plummeted and poverty nearly doubled in just the first five weeks of the war.

“The Russian ruble is no longer an indicator of the health of the economy,” said Hess. “While the ruble has risen due to Kremlin intervention, its disregard for Russian welfare continues. Even Russia’s own statistics agency, known for massaging numbers to meet the Kremlin’s goals, acknowledged that the number of Russians living in poverty has increased by 12. [million] up to 21 million people in the first quarter of 2022.”

Whether the ruble’s strength can be sustained, Fiotakis said, “it is very uncertain and depends on how geopolitics evolves and policies are adjusted.”

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