The Russian ruble has emerged as the best-performing currency in 2022, despite wide-ranging sanctions imposed for its invasion of Ukraine. It is nearly 30% higher against the US dollar, as of May 23, for the year.
How did the Russian currency make a dramatic recovery from its record low of 143 rubles to the dollar on March 7?
The rally, experts say, is largely artificial, the result of capital controls imposed by Moscow in the wake of Western sanctions. While the ruble may look promising on paper, in reality, many money changers have stopped dealing in the currency because of the extreme volatility in its exchange rate due to low trade volumes.
In any case, as William Jackson, the chief emerging markets economist at Capital Economics, told Quartz earlier, the ruble’s value is not the best barometer of how well western sanctions are working:
“Irrespective of the moves in the ruble, the sanctions are hurting Russia’s economy hard,” Jackson said. “Inflation is already surging, the banks are under strain and financial conditions have tightened dramatically.”
Late in March, Russia insisted that European Union countries that purchase natural gas from Russia to make payment in rubles, rather than in dollars or euros. This was when the ruble was down 40% from pre-war levels, offering a good deal for buyers.
European countries rely heavily on Russian gas, and despite plans to wean themselves away, there aren’t alternative suppliers they can easily turn to. In addition to boosting demand for the ruble, this step was also a way for Moscow to circumvent sanctions designed to restrict Russia from acquiring dollars or euros to repay its external debt.
The increase in oil and natural gas prices also means that a country that imports crude oil from Russia will now have to pay more dollars for every barrel, and hence need more rubles.
On Feb. 28, the Central Bank of Russia raised its interest rates to 20% in an emergency move. This means anyone who is looking to sell rubles for dollars now has an incentive to hold the Russian currency, which would in turn cushion the fall in the ruble.
Further, the Russian government forced export-focused businesses to convert 80% of their foreign currency into rubles. For example, if a Russian company earns $100 from selling a commodity to a company based out of the US, they have to swap $80 into rubles, regardless of the exchange rate. Considering Russia has resilient trade relations with several foreign companies, the move triggers significant demand for the Russian currency, thus also helping to prop it up.
The US Treasury Department appears to be set to suspend the exemption from sanctions for Russia’s dollar bond payments as of May 25, according to Bloomberg, while its next bond payments are due May 27. That means Russia is staring in the face of a sovereign debt default.
“A lot of this is just man-made currency strength,” Brendan McKenna, currency strategist at Wells Fargo Securities told Bloomberg. “If all these policy measures weren’t in place it would probably be at the 180 level based on the evolution of the conflict.”