The insolent strength of the ruble despite the rain of sanctions

After a historic collapse in the wake of the offensive in Ukraine, the ruble has regained its colours, a success, fueled by the energy windfall, in the face of Western sanctions, but which does not reflect the real health of the economy.

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In late February and early March, the currency market panicked. The ruble goes from levels never seen before against the greenback: 100 rubles, then 120…until more than 140 rubles per dollar reached on March 7th.

But since that day, the Russian currency has continued to strengthen, and on Friday reached 71 rubles per dollar, a record since the fall of 2021, and 77 rubles / euro, its strongest level since June 2020.

For the authorities, this is excellent news, the course of the ruble being an indicator closely scrutinized by the population, signaling that the sanctions are not chipping away at the Russian fortress.

How to explain such a performance, while unprecedented Western sanctions are piling up on Russia?

According to Sofya Donets, chief economist for Russia at Renaissance Capital, the answer lies in an unprecedented trade surplus.

“Imports into Russia have declined, while exports are solid, and with high hydrocarbon prices, this gives an estimated trade surplus of 20-25 billion dollars in March”, a record according to the economist.

Oil and gas, Russia’s main exports, continue to flow, filling Russia’s coffers.

“Certainly, Russian oil (Urals) is selling at a lower price” than Brent, “but it remains higher than the price of 2021”, she notes.

However, announcements have been made. Washington has thus decreed an embargo on Russian oil, the EU a ban on the metals sectors.

“These are noisy announcements, but if we look at the figures, this only concerns 5% of Russian exports”, notes Sofya Donets.

As long as Europe, the first buyer of Russian hydrocarbons, continues its purchases, significant revenues are guaranteed to Moscow.

Robust exports are complemented by draconian capital controls introduced by the Central Bank. The latter was indeed hit with unexpected sanctions: its foreign currency reserves held abroad, nearly 300 billion dollars, were frozen.

However, it is this windfall that it traditionally used to defend the Russian currency in the event of a hard blow.

To compensate, all exporting companies were forced to sell 80% of their export earnings to buy rubles.

Individuals have been limited to 10,000 dollars purchased per month and one cannot leave the territory with more than this sum. With most international transfers blocked, and foreigners banned from selling their Russian assets, the financial market finds itself in a vacuum.

These capital controls have worked so well to strengthen the ruble that on Friday the Central Bank surprised by lowering its key rate to 17% without notice, after doubling it in emergency to 20% on February 28.

“It gives them space to focus on domestic issues,” according to a note from Renaissance capital, namely finding a balance between runaway inflation and the looming recession. The investment bank predicts a peak of 24% inflation in the summer, before a decline.

In March, inflation soared to 16.7% year on year, according to data from the statistics agency Rosstat published on Friday, a level not seen since the beginning of 2015.

Compared to February this year, price increases even accelerated by 7.6% month-on-month, a record since the 1990s, according to Capital Economics.

“The Russian stock market and the ruble remain disconnected from global macroeconomic factors and the flow of information,” Alfa bank said in a note, estimating that the ruble will be around 80-85 to the dollar in the near future.

“The ruble rate has become a local instrument, there are no financial flows. The market is currently destroyed, and the price of a currency is a factor in international trade,” notes Sofya Donets.

“Where would it be if there were no capital controls? Hard to say,” she concludes, citing an unprecedented situation.

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