The Russian ruble’s return to its pre-war exchange rate should not be mistaken for a sign of strength or resistance. Rather, the currency has benefited from factors that will eventually become major headwinds for both the federal budget and the real economy.
PARIS – After plummeting in value following the Russian invasion of Ukraine, the ruble’s parity with Western currencies has returned to pre-war levels. But this should be of little comfort to the Kremlin, because the factors that fueled the ruble’s rally portend additional problems for Russia’s economic performance.
The West has displayed almost unprecedented unity and determination in its response to Russian President Vladimir Putin’s war against Ukraine. Within three days of the invasion, Western country governments had frozen much of the Russian central bank’s foreign currency reserves within their respective jurisdictions.
This move triggered a financial panic within Russia and stimulated a powerful political response. On February 28, the central bank imposed strict capital controls, tightened restrictions on foreign exchange trading and raised its key policy rate from 9.5% to 20%.
Russia’s government then ordered all Russian exporters to repatriate and exchange 80% of their export earnings for rubles, and the central bank introduced a 30% commission (later reduced to 12%) on foreign currency purchases. . Several categories of buyers were prohibited from purchasing US dollars, and holders of bank deposits denominated in foreign currency faced significant restrictions in withdrawing their savings.
Despite this swift political response, however, the official exchange rate for the ruble rose from 81 to the dollar before the war to 139 to the dollar on March 9 (although the black-market parity was reportedly much higher). highest). Inflation accelerated substantially, with the growth rate of the official consumer price index rising to 2% per week (181% in annual terms) in the first three weeks of the war, before slowing to 1% per week (68% in annual terms). by year).
Since then, the ruble has recovered and is now back in the range of 80 per dollar. But his appreciation is not necessarily real. If trading in a currency is severely restricted, its exchange rate does not reflect its market value. During the Soviet era, the Communist Party’s flagship newspaper, Pravda, constantly reported the official ruble exchange rate as 0.6 per dollar, but no one saw this as an indicator of the currency’s real strength.
To be sure, there are tangible signs that the pressure on the ruble is easing. Late last week, the central bank eliminated the 12% fee for buying dollars, relaxed certain limitations on currency-denominated deposits and, most importantly, lowered its policy rate from 20% to 17%. , while signaling that further relaxation was on the way. These actions express stronger than any official statement about the strength of the Russian economy.
Still, growth projections for Russia this year remain bleak. According to the central bank, GDP will fall by 8% this year; before the war, it was expected to rise by 2.4%. The Institute of International Finance forecasts a 15% drop in GDP, while the European Bank for Reconstruction and Development (EBRD) and most international investment banks forecast a 10% drop. The head of the Russian Accounts Chamber, Alexei Kudrin, agrees.
The recent appreciation of the ruble does not invalidate these pessimistic views, because the exchange rate recovery is simply a reflection of unprecedented import restrictions and higher oil and gas prices.
Western governments have imposed harsh sanctions on technology exports to Russia, which have been reinforced by a private sector boycott, with more than 600 Western companies having withdrawn from Russia.
Households and businesses have lost access to many imported consumer goods and intermediate inputs at home, while airspace closures and boycotts by Airbus, Boeing and major insurers and leasing companies have made it almost impossible for Russians to travel to the West.
Because these restrictions have substantially reduced Russian demand for imports, economists Oleg Itskhoki and Dmitry Mukhin point out, they have also reduced the demand for dollars (which are needed to buy such goods), which has pushed up the exchange rate. of the ruble. But that’s not good news for Russia’s economy, which is bound to slow.
Just as the Covid-19 pandemic forced companies around the world to reckon with their reliance on global supply chains, Vladimir Putin’s war has shown Russian businesses that they cannot function without imports. Even those who source their supplies domestically have found that their suppliers are dependent on imports from the West. That is why the Russian auto industry has ground to a halt, with sales in March falling to a third of their level in March 2021.
Furthermore, the demand for dollars has been further reduced by financial sanctions that essentially prohibit Russia from using dollars even to pay off its dollar-denominated debt. These measures have already resulted in a sovereign technical default.
The second factor driving the appreciation of the ruble is the high price of oil, which has returned to 2014 levels. Back then, the ruble was trading at 38 to the dollar, or 52 to the dollar at today’s prices (after adjust for inflation in both Russia and the United States).
Therefore, today’s oil prices imply the possibility of further appreciation of the ruble, except for the fact that geopolitical risk and capital flight have weakened the ruble more than it might have otherwise.
Today’s exchange rate indicates that Russia’s balance of payments is strongly supported by current oil prices, implying that fiscal performance is also holding up well. While the first sanctions froze much of Putin’s cash reserves, high oil prices have ensured significant daily flows.
But this could also become a problem for Putin. As EU High Representative for Foreign Affairs and Security Policy Josep Borrell recently pointed out, the EU has sent 35 billion euros ($38.1 billion) to Russia since the start of the war, but only 1 billion euros in help Ukraine.
This appalling disparity has not gone unnoticed by European leaders, as growing support for an oil and gas embargo attests. In fact, the Europeans are already talking about the embargo not in terms of “if” but in terms of “when”.
An EU-wide decision to stop importing Russian oil and gas will have catastrophic consequences for Russia’s federal budget and will make the ruble’s recent recovery unsustainable.
The author
Sergei Guriev, former chief economist at the European Bank for Reconstruction and Development and former rector of the New Economic School in Moscow, is a professor of economics at Sciences Po.Copyright: © Project Syndicate 1995–2022