The Russian ruble emerged as the most effective currency in 2022, despite widespread sanctions for its aggression in Ukraine. As of May 23, for the year it is about 30% higher than the US dollar.
How did the Russian currency make a dramatic recovery from the record of 143 rubles to the dollar on March 7?
Experts say the rally is the result of artificial, Western sanctions imposed by Moscow on capital controls. While the ruble may seem promising on paper, in reality, many money changers have stopped trading in the currency because of the extreme volatility in its exchange rate due to low trading volume.
However, as William Jackson, chief emerging market economist at Capital Economics, told Quartz earlier, the value of the ruble is not the best barometer of how well Western sanctions work:
“Regardless of the ruble’s move, the sanctions are hurting the Russian economy severely,” Jackson said. “Inflation is already rising, banks are under pressure and the financial situation has improved dramatically.”
Tendency on Russian natural gas buyers
Towards the end of March, Russia insisted that EU countries purchase natural gas from Russia in rubles instead of dollars or euros. This was when the ruble was 40% lower than the pre-war level, offering a good deal for buyers.
European countries rely heavily on Russian gas, and despite plans to release their own milk, there are no alternative suppliers that they can easily go to. In addition to increasing demand for the ruble, the move was a way for Moscow to avoid sanctions designed to limit Russia from acquiring dollars or euros to pay off its external debts.
Rising oil and natural gas prices mean that a country that imports crude oil from Russia will now have to pay more dollars per barrel and therefore need more rubles.
Demand for the ruble has risen
On February 28, Russia’s central bank raised its interest rate to 20% In an emergency. This means that anyone who now wants to sell the ruble for the dollar has an incentive to hold on to the Russian currency, which will reduce the ruble’s fall.
Furthermore, the Russian government has forced export-oriented businesses to convert 80% of their foreign exchange into rubles. For example, if a Russian company earns $ 100 by selling goods to a company located outside the United States, they will have to exchange it for $ 80 rubles regardless of the exchange rate. Considering that Russia has a resilient trade relationship with several foreign companies, the move triggers significant demand for the Russian currency, thus helping to support it.
On March 9, the Russian government also temporarily restricted it The amount of 5,000 remittances by individuals to other countries, although the limit was relaxed in April From 10,000
Only a short-term fix
According to Bloomberg, the US Treasury Department is expected to suspend exemptions from Russian dollar bond payments until May 25, when its next bond payment will be on May 27. This means that Russia is facing sovereign debt. Default.
“Most of it is just the power of man-made currencies,” Brendan McKenna, a currency strategist at Wells Fargo Securities, told Bloomberg. “If all of these policies were not in place, it would probably be at 180 levels based on the evolution of the conflict.”