Dynamics Drives Ruble Recovery As Far As Slightly Artificial: Reuters Report

The rebound of the Russian ruble was not as real as expected


The ruble had launched a lightning-fast recovery to the last level reached in the days before Russia invaded Ukraine, defying predictions that the war would launch it into a free dive.

The dramatic rebound – the value of the currency nearly halved in seven trading sessions following the February 24 invasion – was partly due to a genuine improvement in Russia’s finances as energy export revenues expanded and imports declined.

But using it as evidence that the sanctions -stricken Russian economy has come out of the woods would be misleading.

The currency is also being artificially inflated by capital controls and, with the country’s gross domestic product projected to shrink 10 percent -15 percent this year, Russians are quickly becoming poorer as soaring inflation eats away at their incomes.

“This (ruble recovery) should not be considered a market view of the medium to long -term prospects for Russia,” said Ulrich Leuchtmann, an analyst at Commerzbank.

“Market forces cannot drive the ruble the way they can the euro or the dollar,” he added, noting that while Russia’s demand for foreign exchange is falling, speculators who use the currency to bet on a country are now absent.

Since the war began, the ruble has split into an onshore market for local institutions, and an offshore market for Western banks and investors to trade with each other and entities that are not subject to restrictions. Volume has dried up on both.

JPMorgan said this week that Western banks have reduced trading volumes and credit to Russian entities, creating “friction between offshore and onshore trade”.

However, when the ruble has recovered, the price gap between markets has narrowed.

According to Refinitiv data, the offshore ruble this week was quoted as strong as 75 per dollar, around where it traded on the eve of the invasion which Russia referred to as a “special military operation”.

On March 7, it hit a record low of 150 per dollar.

On the offshore market, the ruble on Friday hit 80.33 per dollar, the last level seen before the intrusion on February 23 and far from the March 10 low of 121.5.

‘Lean …’

The White House on Thursday said Moscow was artificially “backing up” the ruble, and the role of official measures in the recovery was easy to determine.

In response to the comprehensive sanctions, Russia raised interest rates to 20 percent, restricted local firms’ access to foreign currency cash, prevented citizens from withdrawing more than $ 10,000 in foreign currency for six months, and stopped banks from selling hard currency in cash. .

Foreign investors have been banned from exiting securities, limiting scrambles to dispose of rubles, and President Vladimir Putin on Thursday demanded foreign buyers pay in rubles for Russian gas starting April 1.

“European countries are not ready to do this, because if it succeeds and European countries agree to this, it will have a supportive impact on the ruble market,” said Danske Bank chief analyst Minna Kuusisto.

Analysts generally see Putin’s request as an attempt to weaken sanctions and strengthen the currency, and Kuusisto noted that Russian gas sellers in the past did not fully convert foreign exchange earnings into rubles.

… But Trade -Driven Profits Too

Part of the ruble’s recovery however is genuine: the currency can perform well even if the economy deteriorates, as long as the balance of payments position improves.

Analyzing tanker traffic data, the International Institute of Finance (IIF) estimated Russia’s oil export earnings in March at $ 12.3 billion – a sharp rise in March 2021 as energy prices soared.

Declining imports could see the current account surplus double from 2021 to $ 200- $ 240 billion this year, the IIF also estimates.

IIF chief economist Robin Brooks acknowledged the question of the ruble move was valid given capital controls, although he considered the recovery “genuine”, pointing to Kazakhstan’s currency oil -exporting partner, which has recovered half of its losses after the invasion.

In the long run, ruble wealth looks less profitable.

Isolation from the West is likely to mean fewer buyers for Russian exports, and if oil prices fall, the ruble will run into difficulties. With half of $ 640 billion of gold and its foreign exchange reserves frozen, Russia has less scope to defend the currency.


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