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The Graphic Truth: Tracking the ruble rebound
The ruble is back on top. Why?
What a wild ride the ruble has had so far this year.
Russia's currency nosedived in late February, losing as much as 30% of its value against the US dollar when Western nations slapped tough sanctions on the Kremlin for invading Ukraine. But then Vladimir Putin pulled out all the stops to save the ruble.
Spoiler: it worked.
First, the central bank immediately doubled interest rates and imposed strict capital controls to stop cash from leaving the country. The Kremlin also forced corporations to exchange most of their foreign currency receipts for rubles, creating artificial demand for the Russian currency.
Next, Putin demanded that all “unfriendly” countries — those that imposed sanctions on Russia — pay for Russian oil and natural gas in rubles. Although most European governments refused, many private companies in the EU decided to comply rather than risk disruptions to their energy supplies.
What’s more, imports have plummeted due to sanctions, meaning that fewer rubles are chasing foreign goods, which props up the value of each ruble. And energy prices are at multiyear highs. In the first four months of the year, Russia had its highest current account surplus — the difference between exports and imports — since 1994.
As a result, the ruble is now up 25% against the dollar this year, making it the world’s best-performing major currency in 2022.
So, is this good or bad for Russia? It depends. On the one hand, a strong ruble is surely a source of national pride for many Russians. On the other, it's hardly convenient if sanctions make it hard to buy foreign goods with it.
Also, a strong local currency could hurt the budget: since expenditures are in rubles, a weak ruble is actually the best way to top up the state's coffers when energy prices are high because sales in dollars or euros get converted into more rubles.
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Packs of 1,000-ruble notes at a printing factory in Moscow.
Russian ruble weathers sanctions storm
Having plunged to a record low against the US dollar in early March, the ruble has since recovered most of its losses. Does this mean sanctions can’t impact the Russian economy as much as the West hoped? We asked Eurasia Group senior analyst Jason Bush for his take on the strength of Russia’s economy amid the war and the Western backlash.
The ruble recently recovered its sanctions-related losses: how?
The sanctions have done relatively little to impact Russia’s large earnings from energy exports, where prices have soared. Normally, such sky-high commodity prices would strongly support the ruble, and at present, they are helping offset the negative impact of sanctions.
We see this in Russia’s balance of payments data. Although there was a huge $64 billion outflow of capital in the first quarter — showing both foreign investors and ordinary Russians rushing to dump the ruble and buy foreign currency — this was compensated by an almost equally massive $58 billion surplus in Russia’s net foreign earnings (the current account surplus). This unusually large surplus is being powered by energy exports, which are expected to be worth more than $300 billion this year.
There are other factors, too. The Russian central bank has introduced tight capital controls, forcing companies to convert 80% of their export earnings into rubles and also limiting how much cash Russians can transfer abroad. The bank has also jacked up interest rates (the official central bank rate is 17%) to encourage depositors to keep their money in rubles.
It has also stopped accumulating foreign exchange reserves, which means that billions of dollars and euros that would normally be saved abroad by the central bank each month are instead flooding onto the forex market, meeting Russians’ heightened demand for foreign currency and therefore supporting the ruble.
What does this ruble level tell us about how well Russia is weathering sanctions?
A stable currency brings some economic benefits to Russia. For one thing, it reduces the risks of a banking crisis in which depositors rush to take their rubles out of Russian banks. It also means inflation will be lower than would be the case if the ruble plunged more seriously. However, the ruble’s resilience does not mean that Russia’s economy is shrugging off the sanctions. Even Russian officials now predict the economy will shrink by 10% this year, and some economists think the slump will be even worse.
One point to remember is that the central bank has been forced to take drastic steps, such as jacking up interest rates, which imposes major costs on the economy even if these measures succeed in stabilizing the currency. Another point is that, although the impact of sanctions on the ruble has been relatively weak so far, this impact will probably strengthen over time. The sanctions are clearly very negative for investment in Russia, and eventually, they can be expected to have a bigger negative impact on trade than has been apparent so far.
Western governments have talked about sanctioning more Russian energy exports. How much would that change things?
As Russia’s huge earnings from energy exports have been crucial in supporting the ruble, and more generally the Russian economy, it follows that meaningful steps to curtail these exports would be the most effective way for the West to increase the economic pressure.
The snag is that dependence cuts both ways. Western countries and particularly European ones are reluctant to ban Russian energy imports as this would risk severe energy shortages at home and an economic recession. This makes a full embargo impractical for the time being. Nevertheless, the West looks likely over time to increase sanctions on energy imports from Russia and more generally cut its dependence on Russian oil and gas.
How does all of the above affect Putin's political standing and choices at home?
So far there is not in fact much evidence that the Russian public is turning against Putin. His approval rating has in fact risen to over 80%, which no doubt reflects a patriotic rally-round-the-flag effect. Still, it will be interesting to watch whether this support holds up once the sanctions begin to bite into the incomes of ordinary Russians — as they undoubtedly will if the economy shrinks by 10% as expected.
Although most Russians probably do not care that much about the value of the ruble on foreign exchange markets, they do care about inflation, which will be a consequence if the ruble resumes its decline. Higher inflation is also being driven by other factors besides a weaker currency, such as disruptions to imports caused by trade sanctions or foreign companies pulling out.
So Putin has reasons to worry that the public mood could eventually sour and his popularity fall. So far, though, there is little sign this is influencing his decisions over the war.
How might all of this affect the war itself?
In terms of Russia’s economic capacity to continue the war, sanctions still seem a long way away from having a decisive impact. Russia’s continued huge export earnings mean the government is not short of money to fund the war. Continued financial stability and the seemingly high public support for Putin also mean he has no immediate incentive to change course.
Nevertheless, Putin may also be aware that as the economic costs mount, his public support could prove fragile. Arguably, this may push him towards a relatively rapid conclusion of the war. But so far, there is still not much tangible evidence that sanctions and economic difficulties are strongly influencing Putin’s military decisions.
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Biden speaks to Scholz during an EU leaders summit in Brussels.
What We're Watching: US-EU gas deal, Putin's ruble ruse, China-India meeting
EU signs US gas deal amid Biden's European trip
US President Joe Biden kicked off his meetings in Europe on Thursday with a few big salvos. Ship more weapons and humanitarian aid to the Ukrainians? Check. Welcome 100,000 Ukrainian refugees to the US? Check. Zoom with Ukrainian President Volodymyr Zelensky? Of course. Biden also said Russia should be booted from the G20, a grouping of the world's largest economies, ahead of a summit later this year in Indonesia.
The G-7 countries and the EU leveled new sanctions on Thursday against more than 400 Russians, including members of the Russian legislature. But the allies still aren't giving Zelensky what he really wants: a NATO-enforced no-fly zone to let civilians escape Russian attacks.
On Friday, the US and EU announced a major new gas deal that will see the US provide the EU with at least 15 billion additional cubic meters of liquified natural gas — last year it provided 22 billion cubic meters — by the end of 2022. The move is the latest bid to help reduce Europe's reliance on Russian gas. European leaders have shown little appetite for following the American example of banning Russian oil and gas outright, which German Chancellor Olaf Scholz warned would trigger a recession on a continent heavily dependent on Russian fossil fuels. Vladimir Putin, who knows this, recently hatched a cunning plan to cash in on his immense energy leverage over the EU ...
Putin's ruble ruse
With the ruble at historic lows and energy prices soaring over Western sanctions against Russia, Putin has found his own way to weaponize the financial system: he wants countries that backed anti-Russia sanctions to pay for Russian commodities in rubles. Why? First, he’s throwing the sanctions weapon right back at the West and artificially increasing demand for Russia's currency to prop up the ruble. Second, the Russian central bank desperately needs to exchange more rubles for hard currency to avoid defaulting on its sovereign debt. Third, a stronger ruble will help mitigate the impact of sanctions on ordinary Russians, whose cost of living has jumped 14% in recent weeks. Putin hopes Europeans are hungry enough for Russian oil and natural gas that they will ultimately cough up rubles. But to do so, Moscow's European customers would have to open accounts in the few Russian banks that haven't been sanctioned. And that's risky business ... because those banks could next.
Will China and India make up?
China’s foreign minister is visiting India on Friday for the highest-level bilateral talks between the two Asian powers since dozens of their soldiers were killed in clashes in contested territory in the western Himalayas two years ago. Wang Yi, Beijing’s top diplomat, is meeting his Indian counterpart to discuss the war in Ukraine and related energy and food shortages. Beijing and Delhi — both chummy with Moscow, but for different reasons — have so far refused to condemn Russia’s offensive in Ukraine. The topic of Nepal will also likely be on the agenda. India and China have long vied for influence in the landlocked Himalayan country and are likely unhappy that Kathmandu is trying to reduce its reliance on them in favor of a tilt toward Washington. China has been trying to improve relations with longtime rival India for some time. Less clear, however, is how India — part of the Quad alliance aimed at limiting Beijing’s influence in the Indo-Pacific — feels about getting cozier with Beijing. Things got off to a shaky start with India rebuking China over its remarks about the contested Kashmir region.The Graphic Truth: Ukraine war hits ruble hard
Russia’s currency nosedived on Monday, losing as much as 30% of its value against the US dollar after fresh allied sanctions targeted Russia’s central bank and key lenders. The ruble has suffered double-digit losses in a single day only twice before. Once during the 1998 Russian financial crisis, and again in late 2014 as a result of collapsing oil prices and Western sanctions over Russia’s annexation of Crimea. Here’s a look at how the ruble has fared over the past quarter-century.