Russian Ruble at Record High, but is This Economic Strength? Here’s Why Not
On Wednesday, 1 Russian ruble was 52.3 to the US dollar, up almost 1.5% from Tuesday and the best level in more than 7 years. At the beginning of March, it was down to 139 to the dollar, CNBC wrote in an in-depth analysis.
That’s when the unprecedented sanctions on Moscow were imposed by the US and the EU in response to Russia’s invasion of Ukraine.
Is this proof that Western sanctions have failed?
The Kremlin cited the ruble’s impressive surge in the following months as “evidence” that Western sanctions have failed. During the annual International Economic Forum in St. Petersburg last week, President Vladimir Putin said:
The idea was clear: crush the Russian economy violently. They did not succeed. Obviously, that didn’t happen.
Record oil and gas revenue
The sanctions, capital control, and soaring energy prices are behind the ruble’s newfound strength. Russia is the biggest exporter of gas and the second-biggest exporter of oil in the world. The EU is its main customer. It has been pushing sanctions while purchasing billions of dollars’ worth of their gas and oil every week.
A paradox for the EU
In what has emerged as a paradox for the EU, the money it has sent to Russia for oil, gas and coal is far more than that sent to Ukraine in aid. Prices of Brent crude are up 60% y/y and Russia’s raking in record profit although many Western countries have cut down on Russian oil import.
It could take EU member states years to reduce their reliance on Russian energy imports. The bloc imported 41% of its gas and 36% of its oil from Russia in 2020, according to Eurostat.
Major exceptions to oil ban fuel Russian economy
While the EU passed a substantial sanctions package in May, banning oil import by the end of 2022, there are major exceptions for oil delivered by pipeline. Slovenia, Hungary, and other landlocked countries can’t access alternative oil sources.
In an interview with CNBC, Foreign Policy Research Institute fellow Max Hess explained the phenomenon:
That exchange rate you see for the ruble is there because Russia is earning record current account surpluses in foreign exchange. Although Russia may be selling slightly less to the West right now, as the West moves to cutting off [reliance on Russia], they are still selling a ton at all-time high oil and gas prices. So this is bringing in a big current account surplus.
The role of capital controls
Capital controls are where the government imposes restrictions on foreign currency transferred out of the country. What’s more, Russia can’t import as many goods anymore because of sanctions, so they’re spending less money on import.
Hess added:
The ruble on paper is quite a bit stronger, but that’s the result of crashing imports, and what’s the point of building up forex reserves when Russia can’t buy things from abroad that it needs?
According to Themos Fiotakis, head of FX research at Barclays Bank, the ruble’s strength doesn’t necessarily reflect the actual state of the Russian economy. He stated:
Ruble strength is linked to a surplus in the overall balance of payments, which is much more driven by exogenous factors linked to sanctions, commodity prices and policy measures than by longer term underlying macroeconomic trends and fundamentals.
Soaring unemployment and poverty
In the middle of May, the Russian Ministry of Economy predicted unemployment to reach 7% this year and that a return to 2021 levels cannot be expected before 2025. Thousands of multinational countries left Russia since the war in Ukraine began, leaving unemployed Russians behind in droves.
Hess concluded:
The Russian ruble is no longer an indicator for the health of the economy. While it has surged thanks to the Kremlin’s interference, its inattention to Russians’ well-being continues. Even Russia’s own statistics agency, famous for massaging numbers to meet the Kremlin’s goals, acknowledged that the number of Russians living in poverty rose from 12 [million] to 21 million people in Q1 2022.
