The Russian ruble is the strongest currency in the world this year
The Russian ruble is the best performing currency in the world this year.
Six weeks after the ruble depreciatedAmid the fastest and harshest economic sanctions in modern history, the Russian currency has made an amazing transformation. The ruble has jumped 40 percent against the dollar since January.
“It’s an unusual situation,” said Jeffrey Frankel, professor of capital formation and growth at Harvard Kennedy School.
Normally, a country facing international sanctions and a major military conflict would see investors flee and a steady influx of capital, causing its currency to plummet. But Russia’s unusually aggressive measures to prevent money from leaving the country – combined with the effectiveness of Western sanctions – are creating demand for the ruble, effectively raising its value.
It also means that Russia is partially insulated from the economic sanctions imposed by Western countries after its invasionalthough how long this protection will last is uncertain.
Why did the ruble recover?
The main reason for the ruble’s recovery is the rise in commodity prices. After Russia invaded Ukraine on February 24, already high oil and natural gas prices soared.
Tatiana Orlova, chief emerging markets economist at Oxford Economics.
Russia withdraws approximately $20 billion per month from energy exports. Since the end of March, many foreign buyers have complied with the requirement to pay for energy in rubles, which further boosted the currency’s appreciation.
At the same time, Western sanctions and a wave of companies leaving the country reduced imports. In April, Russia’s account surplus – the difference between exports and imports – rose to a record $37 billion.
“We have a coincidence that with the collapse of imports, exports rose sharply,” Orlova said.
The Russian central bank has also backed the ruble with strict capital controls that make it difficult to convert it into other currencies. This includes a ban on foreign stock and bond holders taking dividend payments outside the country.
“That was an important source of currency inflows from Russia – now this channel is closed,” Orlova said.
Meanwhile, Russian exporters are required to convert half of their excess revenue into rubles, which increases demand for the currency. (The figure was 80% until this week, when it dropped to 50%.) Moreover, Orlova noted, it is extremely difficult for foreign companies to sell their Russian investments, which is another obstacle to capital flight.
“Although we are seeing these announcements of Western companies leaving Russia, they often simply have to hand over their stakes to their local partners. It doesn’t actually mean that they are getting a fair price for their stakes, so they are not moving large amounts of cash out of the country,” she said. .
All these factors create a strong demand for the ruble, which increases its value.
Elena Rybakova, Deputy Chief Economist at the Institute of International Finance, via email.
How long will it last?
The rise of the ruble has been so strong that it created some challenges for the Russian Central Bank, which this week took steps to bring its currency closer to historical levels.
“The Russian Central Bank is trying to ease capital controls because it feels that the ruble is too strong,” Rybakova said. “But the central bank is in a difficult position – if they continue to relax, they may open the gates to the flow of capital out of the country. In previous crises, $200 billion left the country within months.”
And while the return of the ruble and the strength of Russian oil exports have temporarily eased the economy from sanctions, they are unlikely to last. European countries have pledged to cut their imports of Russian gas by two-thirds this year, for example — something potentially crippling given Russia’s reliance on energy exports.
One sign that the Russian economy remains under severe stress, Frankel of Harvard Kennedy School, said: Inflation in Russia is more than twice the rate in the United States.
“The temptation to take the assets out of Russia, for the Russian citizens to find a way around the controls… will increase, especially with inflation now as high as it has,” he said.
Another concern for Russia is that cutting imports could lead to an industrial shortage, the IIF predicted, while a drop in foreign investment is expected to lower the country’s economic growth for years. The Institute of International Finance predicts that the Russian economy will shrinkwhich wiped out more than a decade of economic development.
“Export controls, a ‘brain drain’ of talent outside the country, a European shift away from dependence on Russian energy, and an exceptionally unfriendly business climate will all affect Russia’s growth in the coming years,” Rybakova said.