How did the Russian ruble benefit from anti-Americanism and the West … to become its strongest performing currency? by

© Reuters – The price reached 52.3 on Wednesday, almost 1.3% higher than the previous day and at its strongest level since May 2015.

This is, of course, very far from its low of $ 139 in early March, when the US and EU began imposing unprecedented sanctions on Moscow in response to its invasion of Ukraine.

The astonishing appreciation of the ruble in the ensuing months fueled the Kremlin as “proof” that Western sanctions had no effect.

“The idea was clear: crushing the Russian economy violently,” Russian President Vladimir Putin said during the annual St. Petersburg International Economic Forum last week. “They did not succeed. Of course, that did not happen.”

At the end of February, after the initial collapse of the ruble and four days after it began its invasion of Ukraine on February 24, Russia more than doubled the country’s base interest rate to 20% from the previous 9.5%. Since then, the currency has improved so much that it has lowered the interest rate three times, to 11% at the end of May.

The ruble has in fact become so strong that the Russian Central Bank is taking action to try to weaken it, for fear that it will make their exports less competitive.

But what is the real reason behind the currency’s rally, and can that rise continue?

Russia achieves record oil and gas revenues

The reasons, put simply, are: strikingly high energy prices, capital controls and the fines themselves.

Russia is the world’s largest gas exporter and the second largest oil exporter. His primary client? The European Union, which buys billions of dollars of Russian energy every week and at the same time tries to punish Russia with sanctions.

This has left the EU in a quandary – it has now sent twice as much money to Russia for oil, gas and coal purchases as to Ukraine as aid, which has helped replenish the Kremlin’s war fund. With prices rising 60% from this time last year, even though many Western countries have restricted their purchases of Russian oil, Moscow is still making record profits.

In the first 100 days of the Russo-Ukrainian War, the Russian Federation raised $ 98 billion in revenue from fossil fuel exports, according to the Center for Energy and Clean Air Research, a Finland-based research organization. More than half of these profits, estimated at $ 60 billion, came from the European Union.

And while many EU countries are committed to reducing their dependence on Russian energy imports, this process could take years – by 2020, the EU has relied on Russia for as much as 41% of its gas imports and 36% of its oil imports. , according to for urostat.

Yes, the European Union approved a historic sanctions package in May that included a partial ban on Russian oil imports by the end of this year, but it had major exceptions for oil supplied through the pipeline, as countries that surrounded by land, as Hungary and Slovenia would not have access to alternative oil resources.Shipped by sea.

“The current ruble exchange rate exists because Russia has record surpluses on the current account of foreign exchange,” Max Hess, a fellow at the Foreign Policy Research Institute, said in an interview with CNBC. Most of this income is in dollars through a complex ruble exchange mechanism

“Although Russia is currently selling slightly less to the West, the West is moving to get rid of it. [الاعتماد على روسيا]However, they still sell large quantities at the highest prices oil and gas have ever reached. It therefore creates a large surplus on the current account. ”

Russia’s current account surplus in the January-May period this year amounted to just over $ 110 billion, according to the Russian Central Bank – more than 3.5 times the surplus during that period last year.

capital management

Capital control – or the government’s restriction on foreign exchange leaving its country – has played a big role here, plus the fact that Russia can no longer import thanks to sanctions means it spends less of its money on goods outside the country.

“The authorities imposed very strict capital controls once the sanctions began,” said Nick Stadmiller, director of emerging market strategies at Medley Global Advisors in New York. The result is an inflow of money from exports while capital outflow is relatively small. The net effect of all this is a stronger ruble. ”

Russia has now loosened its capital controls and lowered interest rates in an attempt to weaken the ruble, as a stronger currency is actually hurting its financial position.

The ruble rate: is it really the “Potemkin price”?

Now, because Russia has been cut off from the international banking system SWIFT and banned from using dollars and euros in international trade, Hess said, it has turned mainly to domestic trade. This means that while Russia is accumulating a large amount of foreign reserves that will boost its currency at home, it will not be able to use these reserves to meet its import needs, thanks to the sanctions.

The ruble exchange rate, Hess said, “is really that of Potemkin, because sending money from Russia abroad under sanctions – whether on Russian individuals or Russian banks – is very difficult, not to mention Russia’s capital controls. “

In politics and economics, the term Potemkin refers to the false villages that were allegedly built to provide the illusion of prosperity for the Russian Empress Catherine the Great.

“So, yes, the ruble on paper is a bit stronger, but it’s due to a collapse in imports, and what’s the point of creating foreign exchange reserves other than using it to do things your economy needs? have for sale from abroad? Russia can not do that. “

“We really need to look at the fundamental issues in the Russian economy, including the flow of imports,” Hess added. “Even if the ruble is said to be overvalued, it will have a devastating impact on the economy and quality of life.”

Does this reflect the real situation of the Russian economy?

Does the strength of the ruble mean that the fundamentals of the Russian economy are strong, that it has escaped the snare of sanctions? Analysts say there can be no decision so quickly.

Does the ruble’s strength mean that Russia’s economic principles are sound and have withstood the onslaught of sanctions? Not so fast, analysts say.

“The strength of the ruble is more related to the overall balance of payments surplus, driven more by external factors related to sanctions, commodity prices and policies than it is to long-term underlying macroeconomic trends and fundamentals,” Themos said. Phyotakis said. , Head of FX Research at Barclays (LON). Search in Barclays.

Russia’s economy ministry said in mid – May that it expects unemployment to reach close to 7% this year, and that a return to 2021 levels is unlikely until 2025 at the earliest.

Since the beginning of the Russian war in Ukraine, thousands of worldwide companies have left Russia, leaving large numbers of Russians out of work. Foreign investment suffered a major blow, and poverty nearly doubled in the first five weeks of the war, according to Russia’s Federal Statistical Agency, Rosstat.

“The Russian ruble is no longer an indication of the health of the economy,” Hess said. While the ruble has appreciated thanks to the Kremlin’s intervention, it does not remain concerned about Russia’s well-being. Even the Russian Statistical Agency, known for compiling numbers to achieve the Kremlin’s goals, acknowledged that the number of Russians living in poverty had risen from 12. [مليون] to 21 million people in the first quarter of 2022. ”

On the possibility that the ruble will remain strong, Vyotakis said: “It is very uncertain and depends on how geopolitics and political adjustments develop.”

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