Based on a Dow Jones market data analysis of 56 currencies, the ruble strengthened this week to levels not seen since 2018, making the currency the best performing currency against the dollar this year. The ruble has risen 22% against the greenback in 2022 and is up nearly 160% since it came down just days after Russia’s invasion of Ukraine three months ago.
Generally, currencies follow economies up or down. In Russia’s case, limited sales and government efforts to force purchases exacerbated this, in fact so much that it began to weigh on the economy.
“I wouldn’t have anticipated it. But when you put capital under control, you’re not seeing anything real,” said Jane Foley, head of forex strategy at Rabobank.
Russia has taken steps this week to weaken the ruble. On Thursday, Russia’s central bank cut interest rates from 14% to 11%, making the ruble less attractive. Earlier this week, Russia eased capital controls that required companies to convert 80% of their foreign exchange revenue into rubles. Now they only have to replace half.
The Russian currency was trading at around 61 rubles against the dollar on Thursday. According to data from Tullett Prebon, it fell to a record intraday low of around 158 on March 7.
The ruble has bucked a global trend of weaker currencies against the dollar, fueled by higher US interest rates and a stronger economy. The euro has fallen 6.1 per cent against the dollar this year. Other winners this year include Brazil and Uruguay.
Economists and traders see the recovery of the ruble as artificial, partly due to Russia’s policies, and partly as a result of Russia’s large commodity exports and the effects of sanctions. In addition to raising rates and forcing companies to buy the ruble, Moscow limited the amount of dollars that Russians could withdraw from foreign currency bank accounts and prevented banks from selling foreign currency to customers.
The combination of sanctions, which reduced imports, and Russia’s commodity exports, which were fueled by higher prices, gave the ruble a further upward momentum. Russia also demanded from European countries to pay for natural gas in rubles.
Those efforts came at a cost. Immediately after the war the central bank doubled its prime interest rate to 20%, essentially rewarding people for holding the ruble, but putting further pressure on the economy. Thursday’s rate cut was the central bank’s third since it raised rates.
A strong currency generally provides benefits to countries, including reducing inflation and making imports cheaper. But sanctions against Russia have devastated the normal dynamics. Russia cannot import much because of sanctions.
With food prices rising by one-fifth compared to a year ago, inflation is rising because of the shortfall. Wages of Russian workers are not keeping pace with real disposable income falling by 1.2% in the first three months of 2022 compared to a year ago. Economists expect the Russian economy to shrink by about 10% this year.
Meanwhile, the stronger ruble threatens to hit the country’s budget by undercutting the value of oil and gas tax revenues denominated in dollars.
While Russian energy companies are converting foreign currency payments into rubles, a stronger currency means “you’re getting fewer rubles per dollar,” says Jason Tuve, senior emerging market economist at Capital Economics.
“From a public-finance point of view, all else equal, a stronger ruble depreciates the local currency value of gas revenues that have been recorded in the budget,” he said. “It comes at the same time that Russia is facing other pressures. The cost of the war in Ukraine to increase social spending.”
Russia’s latest measures have had limited impact on the ruble, which is up 1.9% against the dollar this week, even after falling after Thursday’s rate cut. Market watchers say that it is difficult for the ruble to move on the future path.
Many note that some investors are trading the ruble. After the war broke out, the ruble market split into one onshore market within Russia and another for international markets. After the war, many Western banks stopped offering electronic quotes for buying and selling the ruble.
“Do I think it makes sense economically that the ruble is said to trade stronger than it was before the invasion? No,” said Robin Brooks, chief economist at the Institute of International Finance. “If they were really interested in reversing the strength of the ruble, they could liberalize capital flows and that thing would be very weak. Of course, they wouldn’t. We would get shadow boxed on rate cuts, which is meaningless.”