How Russia’s central bank engineered the ruble’s rebound

The ruble is in a central bank – induced coma.

While Russia’s currency can still see sharp fluctuations in one day, it has trimmed its steep losses and begun to stabilize. It is now trading at about 99 rubles against the dollar, about 17% weaker than it was before Russian troops invaded Ukraine on February 24 but stronger than its record low of 151 on March 7, according to FactSet.

Rising currency prices often reflect a general strengthening of a country’s economic outlook. Not so in Russia. Rather, the central bank’s measures to limit ruble sales and mandatory ruble purchases have effectively created demand for the currency.

Russia limited the amount of dollars that residents can withdraw from foreign currency bank accounts and prevented banks from selling foreign currency to customers over the next six months. Russian brokerages are also not allowed to allow foreign clients to sell securities. These measures have made it more difficult to sell the ruble, thereby limiting its losses.

Western sanctions against Russia provided exemptions for energy exporters on which Europe is particularly dependent, which kept dollars and euros flowing into the country. Russia ordered these exporters to sell 80% of their foreign exchange earnings and buy rubles, which helped the currency appreciate.

“It is fair to say that the ruble is not a market price,” said Robin Brooks, chief economist at the Institute of International Finance. “If there was a free flow in both directions, we would see a much weaker ruble.”

Russian President Vladimir Putin recently said he wanted European nations to start buying Russian gas in rubles rather than dollars and euros. It would reverse the current flow of money, get sanctioned nations to support Russia’s currency and ensure that all funds from energy sales support its value, says Christian Kopf, head of interest income at asset manager Union Investment. Such a move is unlikely, but it signals Russia’s desire to increase demand for the ruble.

Currencies often move with ups and downs in a country’s economy. Investors want to put money into economies that they believe will flourish, by buying stocks and bonds denominated in that country’s bids.

It is more difficult to take such insights from the ruble. Hundreds of companies have announced that they are withdrawing from Russia, which means that imports are likely to decrease. At the same time, Russia continues to sell its oil, which means that exports and money earned on these more than will compensate for the money required for imports. Oil prices above $ 100 a barrel also increase revenues, even when Moscow’s stocks are traded at a discount. The imbalance can strengthen the ruble, even if it does not make Russia’s economy stronger.

“There’s so much stuff you can’t buy or sell,” says George Pearkes, macro strategist at Bespoke Investment Group. “The ruble could be strengthened a lot from here, and it would mean nothing.”

After the outbreak of the war, the ruble market split to have one value within Russia and another in international markets. In rural trade, Russia’s currency was valued at 94 rubles against the dollar on Monday, while it was traded at 98 in international markets. That gap has narrowed since the beginning of March.

Russian banks offered slightly less rubles for customers’ dollars than the Moscow Stock Exchange on Monday. Sberbank PJSC offered about 89 rubles for a dollar while the Russian website of the Austrian Raiffeisen Bank quoted 86.

Many western banks no longer provide electronic quotes to buy and sell the ruble. Customers must instead call the bank and ask if it is willing to process a deal and at what rate. Banks, which are worried about ending up with Western sanctions, must handle every ruble transaction with their legal and compliance departments, traders say.

European countries have announced plans to move away from Russian energy in the coming years, which will also weaken the ruble in the long run.

“We are looking at a Russian ruble that is significantly weaker in the long run,” says Jane Foley, head of currency strategy at Rabobank.

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