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Russia’s economy is tanking—but the ruble is soaring

2022-05-26 00:00:00.0 铸币报-政治原网页

Sanctions against Russia have pushed its economy into what could be the biggest decline in decades—but the country’s currency has gone the other way.

The ruble strengthened this week to levels not seen since 2018, making the currency the best performer against the dollar this year, based on a Dow Jones Market Data analysis of 56 currencies. The ruble has risen 22% against the greenback in 2022 and is up roughly 160% since it bottomed out days after Russia’s invasion of Ukraine three months ago.

Normally, currencies follow economies up or down. In Russia’s case, government efforts that limited selling and forced buying pushed it higher, so high in fact that it has started to weigh on the economy.

“I wouldn’t have anticipated this," said Jane Foley, head of foreign-exchange strategy at Rabobank. “But when you put in the capital controls, you’re not looking at something real."

Russia has taken steps to weaken the ruble this week. On Thursday, Russia’s central bank lowered interest rates to 11% from 14%, making holding rubles less attractive. Earlier this week, Russia eased capital controls that required companies to change 80% of their foreign-currency revenues to rubles. Now they only have to change half.

The Russian currency traded Thursday at around 61 rubles to the dollar. It fell to a record intraday low of about 158 on March 7, according to data from Tullett Prebon.

The ruble has bucked a global trend of currencies weakening versus the dollar, which has been bolstered by rising U.S. interest rates and a strong economy. The euro has tumbled 6.1% against the dollar this year. Other winners this year include Brazil and Uruguay.

Economists and traders see the ruble’s recovery as partly artificial because of Russia’s policies, and partly as a result of Russia’s big commodities exports and the impact of sanctions. Besides raising rates and forcing companies to buy rubles, Moscow limited the amount of dollars that Russians could withdraw from foreign-currency bank accounts and barred banks from selling foreign currencies to customers.

The combination of sanctions, which tanked imports, and Russia’s commodity exports, which were boosted by high prices, gave the ruble further upward momentum. Russia also demanded European nations pay for natural gas in rubles.

Those efforts came at a cost. The central bank doubled its key interest rate to 20% in the immediate aftermath of the war, essentially rewarding people for holding rubles, but putting further pressure on the economy. Thursday’s rate cut was the central bank’s third since it raised rates.

A strong currency typically provides benefits to countries, including pushing down inflation and making imports cheaper. But the sanctions against Russia have scrambled the usual dynamics. Russia can’t import much because of the sanctions.

Inflation is surging due to shortages, with food prices rising by one-fifth compared with a year ago. Russian workers’ wages aren’t keeping pace, with real disposable incomes down 1.2% in the first three months of 2022 than a year before. Economists expect the Russian economy to contract by around 10% this year.

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Meanwhile, the strong ruble threatens to hit the country’s budget by reducing the value of oil-and-gas tax revenues that are denominated in dollars.

Jason Tuvey, senior emerging markets economist at Capital Economics, says with Russian energy companies converting foreign-currency payments into rubles, the stronger currency means “you are getting fewer rubles per dollar."

“From a public-finance perspective, all else equal, a strong ruble depresses the local currency value of gas revenues that are recorded in the budget," he said. “This comes at the same time that Russia is facing other pressures, from the cost of the war in Ukraine to increased social spending."

Russia’s latest measures have had limited impact on the ruble, which is up 1.9% against the dollar this week, even after falling following Thursday’s rate cut. Market watchers say the future path of the outlook for the ruble is harder to glean.

Many note that few investors are trading the ruble. After the war broke out, the ruble market split to have an onshore market within Russia and another for international markets. After the war, many Western banks stopped providing electronic quotes to buy and sell the ruble.

“Do I think this makes sense economically speaking for the ruble to be trading stronger than where it was before the invasion? No," said Robin Brooks, chief economist at the Institute of International Finance. “If they were genuinely interested in reversing ruble strength, they could just liberalize capital flows and this thing would weaken drastically. Of course, they won’t do that. We will get shadow boxing on rate cuts, which are kind of meaningless."