The Russian ruble suddenly fluctuated abnormally

The ruble recovers spectacularly

Two months after the value of the ruble fell to less than 1 cent of the America In the wake of the most rapid and harsh economic sanctions in modern history, the Russian currency has had an amazing change. The ruble has gained 40% against the dollar since January.

CBS quoted professor Jeffrey Frankel, Harvard Kennedy School as saying, this is an unusual situation. Typically, a country facing international sanctions and a major military conflict will see investors flee and capital outflows steadily, causing that country’s currency to fall. price. But Russia’s drastic measures to keep money from leaving the country created demand for the ruble and boosted its value.

The ruble’s resilience means Russia is partially insulated from economic sanctions imposed by Western nations, although how long that protection will last is uncertain.

Why did the ruble recover?

The main reason for the ruble’s recovery was the soaring fuel prices. After Russia launched a military campaign in Ukraine On February 24, the already high oil and gas prices continued to rise.

“Fuel prices are at sky-high levels, and although the volume of Russian energy exports has decreased due to sanctions and sanctions, more price increases have offset this decline,” she said. Tatiana Orlova, lead emerging markets economist at Oxford Economics.

Russia is earning nearly 20 billion USD per month from energy export. Since the end of March, many foreign buyers have complied with the requirement to pay for energy in rubles, pushing up the value of the currency.

At the same time, Western sanctions and a wave of businesses leaving Russia have reduced imports. In April, Russia’s account surplus – the difference between exports and imports – rose to a record $37 billion. According to Orlova, it is a coincidence that, when imports fall, exports skyrocket.

Central bank measures

Russia’s central bank has also bolstered the ruble with strict capital controls that make it more difficult to convert rubles to other currencies. This includes a ban on foreigners who own Russian stocks and bonds from receiving dividends abroad.

Meanwhile, Russian exporters were required to convert half of their revenue (previously 80%) into rubles, creating demand for the currency. On top of that, Orlova noted, it is extremely difficult for foreign companies to sell their Russian investments, another obstacle to capital flight.

“Although we are seeing announcements that Western companies are leaving Russia, often they simply have to transfer their shares to local partners. As such, they are not transferring a single share. huge amount of cash out of the country,” Orlova said.

All these factors are creating demand for the ruble, boosting the value of the Russian currency.

“Although this is not exchange rate determined by the free market, but the stability of the ruble is real, in the sense that it is driven by Russia’s all-time high current-account inflows” – Elina Ribakova, senior economist at Institute of International Finance (IIF) – comment.

The ruble suddenly reversed

On May 27, the ruble reversed course for a second day after Russia’s central bank made an unusual rate cut. According to the Wall Street Journal, the Russian currency fell 2.7% against USD in trading on May 27, after falling 6.7% in trading the previous day. According to data from Tullett Prebon, the ruble’s weekly decline increased to about 6.8% – the largest weekly drop since the second week of the war.

The ruble’s rally has been so strong that it creates a number of challenges for Russia’s central bank. A strong ruble threatens to hit the country’s budget as it will reduce revenue from oil and gas taxes denominated in USD.

To combat the rising ruble, Russia’s central bank in April started cutting key interest rates, reversing its decision to push rates to 20% in February. It wasn’t until May 26, when the central bank When the central bank cut its benchmark interest rate for a third time – bringing it from 14% to 11% and close to pre-war levels – the ruble’s appreciation finally reversed. The ruble ended the trading day on May 27 at about 66.5 rubles to 1 USD. Even so, it is trading nearly 140% higher than its bottom in early March.

According to Ms. Ribakova, Russia’s central bank is trying to relax capital controls because it thinks the ruble is too strong. “But the central bank is in a tough spot. If easing continues, capital may flow out of the country. In previous crises, $200 billion left the country in just a few months.”

According to experts, while the recovery of the ruble and Russian oil exports temporarily supporting the economy from sanctions, that is unlikely to last. For example, European countries have announced that they will cut Russian gas imports by two-thirds in 2022. IIF predicts that the Russian economy will shrink by 15% this year.