The Russian ruble is the best currency in the world this year.
Two months after the value of the ruble fellIn the midst of the fastest and toughest economic sanctions in modern history, Russia’s currency has taken a fantastic turn. The ruble has jumped 40% against the dollar since January.
“It’s an unusual situation,” said Jeffrey Frankel, a 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 outflow of capital, causing its currency to fall. But Russia’s unusually aggressive measures to prevent money from leaving the country, combined with the force of Western sanctions, are working to create demand for the ruble and push up its value.
The resilience of the ruble means that Russia is partly isolated from the punitive economic sanctions imposed by Western countries after its invasion ofalthough it is uncertain how long that protection will last.
Why the ruble recovered
The main reason for the ruble’s recovery is soaring commodity prices. After Russia invaded Ukraine on February 24, high oil and natural gas prices have already risen further.
“Commodity prices are currently sky-high, and although the volume of Russian exports is declining due to embargoes and sanctions, the rise in commodity prices compensates more than in these cases,” said Tatiana Orlova, lead emerging market economist at Oxford Economics.
Russia pulls in almost $ 20 billion month from energy exports. Since the end of March, many foreign buyers have complied with a requirement to pay in energy rublewhich pushes up the value of the currency.
At the same time, Western sanctions and a wave of companies leaving the country have led to a decline in imports. In April, Russia’s account surplus – the difference between exports and imports – rose to a record high of $ 37 billion.
“We have this coincidence that exports are soaring when imports have collapsed,” Orlova said.
Closes the dust hatches
Russia’s central bank has also backed the ruble with strict capital controls that make it more difficult to convert it to other currencies. It includes a ban on foreign holders of Russian shares and bonds to take dividends out of the country.
“It used to be a pretty significant source of outflows for currency from Russia – now that channel is closed,” Orlova said.
At the same time, Russian exporters have to convert half of their surplus income into rubles, which creates demand for the currency. (The conversion rate was 80% until this week, when it dropped to 50%.) In addition, Orlova noted, it is extremely difficult for foreign companies to sell their Russian investments, another obstacle to capital flight.
“Even though we see these announcements that Western companies are leaving Russia, they quite often simply have to hand over their efforts to their local partners. It does not actually mean that they get a reasonable price for their efforts, so they are not the big move. lots of cash from the country, “she said.
All these factors create the demand for rubles, which increases the value of the currency.
“Although this is not a free market-determined exchange rate, ruble stability is at the same time ‘real’, in the sense that it is driven by Russia’s ever-changing current account inflows,” said Elina Ribakova, Deputy Chief Economist at the Institute. from International Finance (IIF), said by e-mail.
How long will the rally last?
The ruble rally has been so strong that it creates some challenges for Russia’s central bank, such as this week train rose to bring its currency closer to historical levels.
“Russia’s central bank is trying to loosen capital controls because it thinks the ruble is too strong,” Ribakova said. “But the central bank is in a difficult situation. If they continue to loosen, the open gates of capital flows could leave the country. In previous crises, $ 200 billion left the country in a few months.”
But while the recovery of the ruble and the strength of Russia’s oil exports have temporarily dampened the economy from sanctions, it is unlikely that it will hold. European nations have promised to reduce their imports of Russian gas by two-thirds this year, for example – a potentially devastating blow given Russia’s dependence on energy exports.
A sign that the Russian economy is still under heavy pressure is that inflation in Russia is more than twice as high as in the United States. It creates pressure for the Russians to move their money out of the country, says Frankel from Harvard Kennedy School.
“The temptation to get assets out of Russia, for Russian citizens to find a way around the controls … will grow, especially with inflation now as high as it has soared,” he said.
Another concern for Russia is that the suspension of imports could lead to industry burst, while a decline in foreign investment is expected to slow the country’s economic growth for several years, the Institute of International Finance predicted. The IIF expects Russia’s economy to shrink obliterates more than a decade of economic development.
“Export controls, the ‘skills flight’ of talent out of the country; a European shift away from Russian energy dependence and an exceptionally unfriendly business climate will all weigh on Russia’s growth in the coming years,” Ribakova said.
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