The Russian ruble continues to rise against the dollar, making it the world’s best performing currency this year.
Three months after the value of the ruble fell toAmid the toughest economic sanctions imposed on a country in modern history, Russia’s currency has taken a surprising turn. The ruble has risen 40% against the dollar since January.
“It’s an unusual situation,” said Jeffrey Frankel, a professor of capital formation and growth at the Harvard Kennedy School.
Normally, a country facing international sanctions and a major military conflict would see investors flee and a steady outflow of capital, causing its currency to drop. But Russia’s unusually aggressive measures to prevent money from leaving the country, combined with a dramatic rise in fossil fuel prices, are working to create demand for rubles and increase their value.
The resilience of the ruble means that Russia is partially insulated from the harsh economic sanctions imposed by Western nations after their invasion ofalthough it is not known how long that protection will last.
Why did the ruble recover?
The main reason for the recovery of the ruble is the rapid increase in the prices of raw materials. After Russia invaded Ukraine on February 24, oil and natural gas prices, already high, rose even higher.
“Commodity prices are currently through the roof, and although there is a drop in the volume of Russian exports due to embargoes and sanctions, the increase in commodity prices more than offsets these drops,” Tatiana Orlova, a leading emerging markets economist at Oxford. Economy, she recently told CBS MoneyWatch.
At the same time, Western sanctions and a wave of companies leaving the country have caused a drop in imports. In the first four months of the year, Russia’s account surplus—the difference between exports and imports—increased to a record $96 billion.
“We have this coincidence that as imports crashed, exports skyrocketed,” Orlova said.
closing the floodgates
Russia’s central bank has also backed the ruble with strict capital controls that make it difficult to convert to other currencies. That includes a ban on foreign holders of Russian stocks and bonds from taking dividend payments out of the country.
“That used to be a pretty significant source of currency outflows from Russia, now that channel is closed,” Orlova said.
Meanwhile, Russian exporters must convert half of their surplus income into rubles, creating demand for the currency. (The conversion requirement was 80% until the end of May, when it dropped to 50%.) On top of that, Orlova noted, it is extremely difficult for foreign companies to sell their Russian investments, another obstacle to capital flight.
“Although we are seeing these announcements that Western companies are leaving Russia, very often they just have to hand over their shares to their local partners. It doesn’t really mean that they are paid a fair price for their shares, so they’re not moving large amounts of cash out of the country,” he said.
All these factors are creating demand for rubles, increasing the value of the currency.
“While this is not a free-market determined exchange rate, the ruble’s stability is at the same time ‘real,’ in the sense that it is driven by Russia’s all-time highest current account flows” said Elina Ribakova, deputy chief economist of the Institute. of International Finance (IIF), she said via email.
Russia still feels the pain
The ruble’s rally has created some problems for Russia’s central bank, which last month took action to bring its currency closer to historical levels. The ruble fell against the dollar in late May as the bank relaxed some capital controls. But the drop was temporary, with the coin hitting a new high this week.
However, a strong currency does not mean that Russia is immune from economic pain. Although the ruble’s recovery and the strength of Russia’s oil exports have temporarily shielded its economy from sanctions, the effect is likely to be short-term, experts say.
Pavel Molchanov, an analyst at Raymond James, noted that Russian oil is selling for $35 less a barrel than Brent crude, the international benchmark, reflecting demand from discount buyers to do business with the nation.
“Today no one would buy Russian oil at $120 a barrel. And, in fact, there are many energy buyers who will not buy Russian oil at any price today, either because of sanctions or because of reputational risk,” he said. “The Russian economy is losing approximately $200 million a day, or $70 billion a year, as a direct result of the war.”
Furthermore, European nations have pledged to reduce their imports of Russian gas to— a potentially devastating blow given Russia’s reliance on energy exports.
One sign that the Russian economy remains under severe pressure is that inflation in Russia is more than double the rate in the US. That is creating pressure for Russians to get their money out of the country, said the School’s Frankel. Harvard Kennedy.
“The temptation to move assets out of Russia, so that Russian citizens find a way around controls… will grow, especially with the rate of inflation now as high as it has skyrocketed,” he said.
Another concern for Russia is that cutting imports could lead to the industry shortage, while a drop in foreign investment is expected to drag down the country’s economic growth for years, the Institute of International Finance forecast. The IIF expects Russia’s economy to contract ending more than a decade of economic development.
“Export controls, a ‘brain drain’ of talent out of the country, a European move away from Russian energy dependency and an exceptionally hostile business climate will weigh on Russia’s growth in the coming years,” Ribakova said.