• Russian ruble soars 70% against the dollar from March lows
  • Capital controls and a large current account surplus bring the ruble to life
  • Despite everything, the exchange rate does not reflect the fundamentals of the economy

Russia’s economy is facing the worst economic recession since the breakup of the Soviet Union. In addition, Moscow is dealing with a battery of sanctions imposed by the West that hit the country’s investment and consumption squarely. To all of the above we must add the uncertainty generated by a war in which Russia is the main party involved. In theory, all this should have brought the ruble to hell, and in the beginning it did. However, after a violent and rapid fall, the ruble has started a comeback that has allowed it to recover the levels prior to the start of the war. What is behind this miraculous recovery?

Since the ruble hit a low on March 4 at $0.0073 per unit, the ruble has soared more than 70% to exceed $0.0131 per unit. This rally that continues this Thursday has taken place despite the fact that the war is not going well for Russia and, above all, despite the fact that the economic expectations for the country are getting worse and the international sanctions do not stop coming. Everything indicates that the strength of the ruble is a mirage caused by an intervened exchange rate that does not even remotely reflect the fundamentals of the Russian economy and the sharp rise in the price of raw materials.

In a scenario without the direct intervention of the Bank of Russia (drastic capital controls) and with total freedom of trade, the Russian ruble should have depreciated much more. The fundamentals of the economy are very negative: GDP is expected to sink by 10% this year (a crisis worse than that of 1998) , inflation is expected to skyrocket above 15%, while foreign investment has already frozen and not expected to return, which will hamper growth, innovation and productivity in the medium term.

Deloitte economists summarily outline the keys to this surprising revival of the ruble: “In part it is because the Russian government imposed severe capital controls, thereby limiting the ability of Russians to move money out of the country. It is also evidence that foreign investors are restricted from disposing of their assets in Russia. Furthermore, the sharp rise in the central bank’s benchmark interest rate provided savers with an incentive to retain their Russian bank deposits. On the other hand, higher prices High prices for oil and other raw materials have allowed Russia to continue generating foreign exchange earnings, despite the obstacles.

A labyrinth with no way out for money

Russia has become a kind of labyrinth with no way out for the money that was already inside the country, so the massive flight of capital has been stopped thanks to the strict controls of the central bank and the Russian authorities. This move has prevented billions from leaving the country (through the sale of rubles for foreign currency) putting further selling pressure on the ruble, which has created a solid short-term ‘floor’ for the exchange rate of Russian currency.

From the International Institute of Finance (IIF) they comment in a note that in addition “the Bank of Russia reacted quickly to the sanctions by more than doubling its interest rates on February 28, which has gone from 9.5% to 20% , providing specific liquidity support to the banking sector and introducing severe capital controls In the first days of the crisis, the Bank of Russia intervened in the market to stabilize the ruble, whose fall was stopped after the asset freeze, as recognized by Governor Nabiullina”.

Despite everything, the central bank lost $38.8 billion in reserves between February 18 and March 25 (defending the ruble exchange rate), which has reduced total reserves to $600 billion (including frozen assets). In addition, the Russian authorities also shut down the domestic stock market for a month and reduced the number of ruble trading sessions, any restrictive measures were good to prevent any leaks through which the rubles could escape.

All of the above has prevented the ruble from sinking further, but there are also other factors that have given the Russian currency ‘wings’ in recent weeks, such as international trade . The sanctions and the multinational companies’ own rejection of the invasion of Ukraine have left Russia without much of its imports (hardly anyone in the West continues to do business with Russia), while Moscow continues to export large quantities of oil and gas , which They have also become extremely expensive in recent months. Sharp falls in imports together with exports that have resisted better have generated very large current account surpluses for Russia.

Current account surplus

These surpluses represent the direct entry of foreign currency that has helped to contain the exchange rate of the ruble, which in turn has also benefited from pressure from Vladimir Putin for Europe and other countries to buy gas and oil in rubles ( a way to increase the demand for rubles in international markets), although later Europe managed to partially avoid the use of the ruble to continue purchasing gas and crude oil.

All of the above, according to data from the IIF, has generated historically high current account surpluses: 39,000 million dollars in January-February and probably an additional 40,000 million in March, and possibly more than 250,000 million for the whole year (in the absence of an energy embargo). Thus, “Russia should be able to recover the ‘lost’ reserves in a relatively short period of time,” they say from the IIF.

In addition, Russian exporters are required to convert 80% of their income into rubles , which contributes to the inflow of foreign exchange into the local market. At the same time, families cannot change more than 10,000 dollars (rubles to dollars) until September and there is enough evidence that even this amount is difficult to obtain in banks.

On the other hand, Russian financial intermediaries must receive explicit approval for the payment of debt to non-residents (payments in hard currency such as the dollar or the euro, normally). All of these controls have artificially strengthened the ruble. “Thus, the recent strengthening of the ruble is not surprising and could be reversed once again if sanctions are tightened in the coming weeks. It is unlikely that this position can be held for much longer if further evidence of Russian war crimes emerges. they warn from the IIF.

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