The ruble’s fall was a powerful symbol of Russia’s financial isolation in the days following the Ukraine war. International sanctions against Vladimir Putin’s regime led to it sinking to record lows of 121.5 rubles per $1. This triggers memories of its beating during the 1998 Russian financial crisis.
It was clear that things were getting dire. U.S. President Joe Biden stated that the ruble had been reduced “to rubble”.
It hasn’t. The ruble has surged back to the level it was before Putin invaded Ukraine. Its recent rally extended to trade as strong at 74.2625 dollars in Moscow’s early Thursday trade.
It is clear that, despite a wide-ranging set of sanctions against the Russian government and its Oligarchs and an exodus from foreign businesses, these actions are largely toothless if foreigners continue to guzzle Russian oil and natural gas — supporting Putin’s coffers by stocking the ruble.
Bloomberg Economics projects that Russia will still be largely excluded from the global economy in 2021, but it will still earn almost $321 billion this year from energy exports, an increase of more than a third.
Putin’s rapid recovery of the ruble is a significant victory in Russia. Many people focus on the currency’s ups, and downs and the military getting bogged down in Ukraine, while outrage rises around the world over the atrocities it has committed.
“It is a great PR tool for politicians by stating that sanctions have no impact. It will also help to limit inflation,” said Guillaume Tresca (a senior emerging-market strategist at Generali Insurance Asset Management).
The ruble-dollar exchange rate is the most important economic indicator in Russia’s post-Soviet past. The exchange kiosks in every city and town broadcast the rate, which was a sign of the currency’s fall as hyperinflation began in the 1990s. After Russia defaulted on its obligations in 1998, the ruble plunged once again.
After the chaos subsided, three zeros were removed by the government. In order to prevent panicking the people and triggering a bank run, the authorities spent billions of dollars during the 2008 crisis to slow down the currency’s slide. Governor Elvira Nabullina took a chance on that risk in 2014 when sanctions due to the Crimea annexed and slumping oil led her to change the currency to a free-floating.
Russia implemented capital controls in response to the sanctions this year. They also seem to be supporting the ruble. This includes the freezing of assets owned by non-resident investors and the instruction to Russian companies to convert 80% foreign currency they have into rubles.
Some observers are skeptical about the significance of the ruble’s return to pre-invasion levels. This is happening despite the lowest trading volume in a decade. Tresca stated that the ruble is not free-floating due to all the restrictions imposed by authorities. Janet Yellen, U.S. Treasury Secretary, said the exact same thing Wednesday in testimony before Congress. She warned against sending any further messages regarding sanctions resulting from the ruble’s rebound.
It’s difficult to overlook the fact that other countries are buying Russia’s oil and gas. This gives Russia a current account surplus, economics jargon that means you export more than you import. It also helps to undermine the attempts to impose sanctions on Russia.
Brendan McKenna, a strategist with Wells Fargo Securities LLC, stated that a current-account surplus could be another source of stability for the ruble. The current account should remain in surplus if energy prices continue to rise and major Russian importers of energy and commodities keep buying.
Russia has been able, at least temporarily, to stabilize the local markets and prevent a foreign default. If the opposition coalition of countries wants to harm the ruble again, they will likely need to change their stance. The U.S. Treasury has stopped Russian dollars from being paid to U.S. banks this week in an attempt to force Russia out of its dollar reserves and make it default.
Elina Ribakova, an economist at the Institute of International Finance, said that Russia’s economy is adapting to a new equilibrium of capital control, managed prices, and economic autarky. It is not surprising that some domestic markets stabilize. “Sanctions are a moving target that will need adjustments in order to continue being effective.
They emphasized the possibility of tighter financial sanctions and possibly even the disconnection of additional Russian institutions from SWIFT (the communications system used by banks to move money around the globe).
Putin was forced to alter his war strategy in Ukraine. He moved troops away from Kyiv, after the failed invasion of the capital. Tellimer Ltd., a research firm, warns against trusting market rallies during negotiations to end the war in Ukraine.
Paul Domjan, Tellimer’s senior analyst, stated that peace rallies should not be bought. Market rallies after news of peace talks should be avoided by investors. As the world valiantly tries to end this war, there will be many false dawns.
