The ruble has a spectacular recovery
Two months after the ruble fell to less than a US cent amid the fastest and most severe economic sanctions in modern history, the Russian currency has seen a remarkable change. The ruble has gained 40% against the USD since January.
CBS quoted Professor Jeffrey Frankel, Harvard Kennedy School as saying that this was an unusual situation. Normally, a country facing international sanctions and a major military conflict would see investors flee and capital flows flowing steadily, causing the country's currency to depreciate. But Russia's drastic measures to keep money from leaving the country have created demand for the ruble and pushed its value up.
The rup's resilience means Russia is partially cut off from economic sanctions imposed by Western countries, although it is uncertain how long that protection will last.
Why is the ruble recovering?
The main reason for the ruble's recovery is the soaring fuel prices. After Russia launched a military campaign in Ukraine on February 24, oil and gas prices, which were already high, continued to increase.
"Ferce prices are sky-high, and while Russia's energy exports have fallen due to sanctions and sanctions, increased price increases have compensated for this decline," said Tatiana Orlova, leading economist for emerging market countries at Oxford Economics.
Russia is earning nearly 20 billion USD per month from energy exports. Since the end of March, many foreign buyers have followed the demand for energy payments in rubles, pushing the value of the currency up.
At the same time, Western sanctions and the wave of businesses leaving Russia have caused imports to decrease. In April, Russia's account balance - the gap between exports and imports - increased to a record $37 billion. According to Ms. Orlova, there is a coincidence that when imports decrease, exports skyrocket.
Central bank measures
The Russian central bank has also supported the ruble with strict capital control measures, making it more difficult to convert rubles to other currencies. This includes a ban on foreigners owning Russian stocks and bonds to receive dividends abroad.
Meanwhile, Russian exporters were asked to convert half of their revenue (previously 80%) into rubles, creating demand for currency. In particular, Ms. Orlova noted that foreign companies find it extremely difficult to sell their investments in Russia, another obstacle to capital flight.
"While we are seeing announcements that Western companies will leave Russia, they often simply have to transfer their stocks to local partners. So they are not moving a large amount of cash out of the country," Orlova said.
All of these factors are creating demand for rubles, boosting the value of the Russian currency.
"Although this is not a free market exchange rate, the stability of the ruble is a reality, in the sense that it is driven by Russia's all-time highest temporary account capital flows," said Elina Ribakova, senior economist at the International Finance Corporation (IIF).
ruble suddenly reverses
On May 27, the ruble reversed for the second day after the Russian central bank unusually cut the exchange rate. According to the Wall Street Journal, the Russian currency fell 2.7% against the US dollar in the trading session on May 27, after falling 6.7% in the previous trading session a day. According to data from Tullett Prebon, the ruble's weekly decline increased to about 6.8% - the largest weekly decline since the second week of the war.
The recovery of the ruble has been so strong that it creates some challenges for the Russian central bank. A strong ruble risks affecting the country's budget as it will reduce revenue from oil and gas taxes calculated in USD.
To counter the rising ruble, the Russian central bank in April began cutting key interest rates, reversing the decision to push interest rates up to 20% in February. It was not until May 26, when the central bank cut the basic interest rate for the third time - bringing the interest rate from 14% to 11% and approaching the pre-military campaign level - that the rupel's price increase finally reversed. The ruble ended the trading day on May 27 at about 66.5 rubles to 1 USD. However, it is trading nearly 140% higher than the bottom in early March.
According to Ms. ribakova, the Russian central bank is trying to loosen capital control because it believes the ruble is too strong. But the central bank is in a difficult situation. If it continues to ease, capital flows may flow out of the country. In previous crises, $200 billion has left the country in just a few months.
According to experts, while the recovery of the ruble and Russian oil exports temporarily supports the economy from sanctions, that is unlikely to last. For example, European countries have announced that they will cut two-thirds of Russia's gas imports in 2022. IIF predicts a 15% decline in the Russian economy this year.
