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How has the ruble recovered strongly from the loopholes in Western sanctions?

Russia’s announcement that it requires “unfriendly countries” to buy gas to pay in rubles, instead of dollars or euros, has put the Russian currency in the spotlight. A month ago, that might have been a pretty good deal: the ruble fell 40%, at 139 rubles for just $1, after Russia’s military campaign into Ukraine.

However, since the lowest point on March 7, the Russian currency has recovered significantly. On April 8, the Moscow Exchange said that for the first time since June 2020, one Euro can be exchanged for 79 rubles. Meanwhile, the US dollar lost 1.58% of its value to 74.55 rubles.

According to NPR, the ruble became the world’s best performing currency in March. So how did the Russians revive their local currency?

The hole in the “wall” of punishment

According to NPR, the ruble recorded an impressive recovery for several reasons.

The first is due to a major flaw in the sanctions imposed by the US and its Western allies: the gas bypass.

Sanctions are put in place to limit Russia’s ability to obtain foreign currency – especially USD and Euro. However, some European countries continue to pay for Russian gas because they are too dependent on this item and cannot find enough alternative suppliers to meet demand.

Oil and gas, Russia’s main exports, continue to flow abroad, filling Russia’s coffers. This allayed fears of Russia’s insolvency, helping to set a floor for the ruble.

Add to this the rising oil and natural gas prices, as well as the resilience of Russia’s trade relations with other major economies such as China and India, and as a result there is still an inflow of money. stable foreign currency into Russia.

How has the ruble recovered strongly from the loopholes in Western sanctions?  - Photo 1.

A woman walks past a currency exchange in central Moscow on February 24. Photo: AFP

Another loophole in sanctions worth mentioning here: sovereign debt.

One of the largest and most impactful sanctions against Russia is the freezing of its foreign accounts.

Russia holds about 640 billion USD in foreign currency, mainly USD, Euro, and yen in banks around the world. About half of these are located in the US and Europe.

Sanctions blocked Russia’s access to that money, except when it had to pay off government debts.

The US Treasury Department is open to allowing financial intermediaries to process payments to Russia. This is expected to end this month, but still helps a lot for Russia.

Without it, Russia may need to increase its dollar holdings by selling the ruble, putting downward pressure on the local currency. If Russia cannot raise enough USD, Russia will default on its debt.

It was tangible externalities that helped drive the ruble’s recovery. Internal factors are somewhat less specific but play a large role in “rescuing” the ruble.

On February 28, the Central Bank of Russia raised interest rates to 20%. Any Russian looking to sell rubles and buy dollars or euros now has a reason to keep that savings deposit. The fewer rubles sold, the less downward pressure on the currency.

Next is the government’s requirement for Russian businesses that 80% of the money they earn abroad must be converted into rubles.

This means that a Russian steel producer making 100 million Euros from selling steel to a company in France has to turn around and exchange that 80 million Euros into rubles, regardless of the exchange rate.

A lot of Russian companies are doing business with foreign companies, earning a lot of Euros, USD and Yen. The order to convert 80% of that revenue into rubles created significant demand for the Russian currency, thus helping the local currency appreciate.

The Kremlin also issued a decree banning Russian brokers from selling securities owned by foreigners.

Many foreign investors own Russian company shares and government bonds and may want to sell them. By banning these transactions, the government strengthened the stock and bond markets, and kept money at home, all of which helped keep the ruble from depreciating.

Russians are also prohibited from withdrawing more than $10,000 in foreign currency or bringing more than that out of the country.

But perhaps the biggest factor driving the ruble is President Vladimir Putin’s demand that “unfriendly countries” pay for gas in rubles.

Natural gas contracts are often accompanied by a requirement for payment in Euros or USD, and gas-buying countries such as the EU countries, the US, Canada, Australia, New Zealand, Japan and South Korea.. do not tend to hold large-scale ruble reserves.

So if Russia succeeds in forcing these countries to pay in rubles, countries will have to go out and buy them.

The demand for the currency will increase and the price of the ruble will naturally increase. It was the anticipation of that increase that helped push the ruble’s market value higher.

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