Sanctions against Russia have pushed its economy into what could be the biggest decline in decades, but the country’s currency has gone the other way.
The ruble strengthened this week to levels not seen since 2018, making the currency the second-best performer against the dollar this year, based on a Dow Jones Market Data analysis of 56 currencies, trailing only the Brazilian real. The ruble has risen 16% against the greenback in 2022 and is up nearly 150% since it bottomed out days after Russia’s invasion of Ukraine three months ago.
Normally, currencies follow economies up or down. In Russia’s case, government efforts that limited selling and forced buying pushed it higher, so high in fact that it has started to weigh on the economy.
“I wouldn’t have anticipated this,” said Jane Foley, head of foreign-exchange strategy at Rabobank. “But when you put in the capital controls, you’re not looking at something real.”
Russia has been taking steps to weaken the currency and the latest move might have ended the rally. On Thursday, Russia’s central bank lowered interest rates to 11% from 14%, making holding rubles less attractive. That sent the ruble falling 6.7% against the dollar.
Earlier this week, Russia eased a capital control that required companies to change 80% of their foreign-currency revenues to rubles. Now they only have to change half.
The Russian currency finished Thursday at nearly 65 rubles to the dollar, weakening from a level of almost 55 rubles per dollar this week. Still, the ruble remains substantially higher than the record intraday low of about 158 reached on March 7, according to data from Tullett Prebon.
Recently, the ruble has bucked a global trend of currencies weakening versus the dollar, which has been bolstered by rising U.S. interest rates and a strong economy. The euro has tumbled about 5.7% against the dollar this year, while the British pound has fallen 6.8%.
Economists and traders see the ruble’s recovery as partly artificial because of Russia’s policies, and partly as a result of Russia’s big commodities exports and the impact of sanctions. Besides raising rates and forcing companies to buy rubles, Moscow limited the amount of dollars that Russians could withdraw from foreign-currency bank accounts and barred banks from selling foreign currencies to customers.
The combination of sanctions, which tanked imports, and Russia’s commodity exports, which were boosted by high prices, gave the ruble further upward momentum. Russia also demanded European nations pay for natural gas in rubles.
Those efforts came at a cost. The central bank doubled its key interest rate to 20% in the immediate aftermath of the war, essentially rewarding people for holding rubles, but putting further pressure on the economy. Thursday’s rate cut was the central bank’s third since it raised rates.
A strong currency typically provides benefits to countries, including pushing down inflation and making imports cheaper. But the sanctions against Russia have scrambled the usual dynamics. Russia can’t import much because of the sanctions.
Inflation in Russia is also surging due to shortages, with food prices rising by one-fifth compared with a year ago. Russian workers’ wages aren’t keeping pace, with real disposable incomes down 1.2% in the first three months of 2022 compared with a year before. Economists expect the Russian economy to contract by around 10% this year.
Meanwhile, the strong ruble threatens to hit the country’s budget by reducing the value of oil-and-gas tax revenues that are denominated in dollars.
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senior emerging markets economist at Capital Economics, says with Russian energy companies converting foreign-currency payments into rubles, the stronger currency means “you are getting fewer rubles per dollar.”
“From a public-finance perspective, all else equal, a strong ruble depresses the local currency value of gas revenues that are recorded in the budget,” he said. “This comes at the same time that Russia is facing other pressures, from the cost of the war in Ukraine to increased social spending.”
Before Thursday, Russia’s maneuvers to weaken the ruble had limited impact. Thursday’s rate cut, however, sent the ruble solidly lower for the week. Market watchers say the future path of the outlook for the ruble is harder to glean.
Many note that few investors are trading the ruble. Richard Benson, co-chief investment officer at Millennium Global Investments Ltd., a London-based currency fund manager, said the company made a decision after the invasion that it didn’t want to trade the currency. Many clients soon after called and asked for the firm to not trade it based on ESG, or environmental, social and governance, reasons.
Ruble trading volumes have also been difficult to discern. After the war broke out, the ruble market split to have one value within Russia and another on international markets. After the war, many Western banks stopped providing electronic quotes to buy and sell the ruble.
“The list of arguments for not trading the ruble is a long one,” said Robin Brooks, chief economist at the Institute of International Finance, noting ongoing capital controls and sanctions. “Do I think this makes sense economically speaking for the ruble to be trading stronger than where it was before the invasion? No.”
If Russia wants the currency to fall further, “they could just liberalize capital flows and this thing would weaken drastically,” Mr. Brooks said. “Of course, they won’t do that.”
Write to Caitlin McCabe at [email protected]
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