The ruble is in a coma induced by the Russian central bank. By limiting sales and forcing purchases, Russia has manufactured demand for its battered currency. While it may still experience wild swings each day, it has trimmed its heavy losses and started to level off. Suffice it to say that the ruble, which was trading at 92.29 per euro the day before the invasion, is now trading at 96.23. That is, almost all the loss recovered.
A coin doesn’t say everything about an economy, far from it, but it’s still significant.
How? First, by limiting the amount of dollars and euros that residents can withdraw from foreign currency bank accounts and prohibiting banks from selling foreign currency to customers for the next six months. Russian brokerage houses also cannot allow foreign clients to sell securities. These measures have made it difficult to sell the ruble, thus limiting its losses.
Western sanctions against Russia left exceptions for energy exporters that Europe is particularly dependent on, keeping dollars and euros flowing into the country. But it also ordered those exporters to sell 80% of their foreign currency earnings and buy rubles, which helped the currency.
Do you want gas? pay in rubles. Vladimir Putin said a few days ago that he wants European nations to start buying Russian gas with rubles instead of dollars and euros. That would reverse the current flow of money, making sanctioning nations support Russia’s currency and ensuring that all funds from energy sales back its value. Such a move is unlikely, but indicates Russia’s desire to boost demand for the ruble.
Trade hasn’t stopped. It is also true that not all reservations are frozen. Russia does not appear to be selling its gold and almost all transactions with the Central Bank of Russia have been banned. So why doesn’t the ruble fall? The economist Johannes Borgen sums it up well in this twitter thread. Two things must be noted. First: countries only care about foreign exchange for international trade. If we found out that the people of Mars have a currency, we wouldn’t mind parity with the euro.
And second: trade hasn’t really stopped with Russia. We still sell things to them (or China does) and they still sell us raw materials and energy. We have seized Vuitton bags and other things, but that doesn’t seem very significant. If you look at the currency balance, the picture is pretty clear: even if stocks are frozen, the flow is still pretty positive for Russia.
The narrative sounds simple: sanctions will crash the Ruble, isolate Russian economy, create massive inflation and hopefully Russia will cave.
But the chart for EUR vs RUB stubbornly disagrees… What’s happening here? Are sanctions not working? why?
Important thread (I think) pic.twitter.com/i4BAjao31U— JohannesBorgen (@jeuasommenulle) March 21, 2022
The exception to the rule. Currencies often move with the ups and downs of a country’s economy. That is, investors want to put money into economies they think will prosper, buying stocks and bonds denominated in that country’s supply. And it is difficult to trust the ruble now. Hundreds of companies have announced a withdrawal from Russia, meaning imports are likely to contract.
At the same time, Russia continues to sell its oil, which means that exports and the money made from them will more than offset the money needed for imports. Oil prices above almost 100 euros a barrel are also giving a boost.
Capital controls. Capital controls have also been a tit-for-tat move after central bank reserves were frozen. In response to the freezing of part of Russia’s reserves, they introduced restrictions on the movement of funds that could be transferred to “hostile countries” for a comparable amount. These included restrictions on the flow of capital, a ban on the sale of securities by foreign investors, a ban on withdrawing their funds from the Russian financial system, and the need to obtain special state approval to make payments to debt holders of ” hostile countries.
But the worst is yet to come. The truth is that many Western banks no longer offer electronic quotes for buying and selling rubles. Instead, customers should call the bank and ask if it is willing to process a transaction and at what rate. Banks, worried about breaking Western sanctions, have to settle every transaction in rubles with their legal and compliance departments.
European countries have even announced plans to move away from Russian energy in the coming years, which will also weaken the ruble in the long run. Jane Foley, head of currency strategy at Rabobank, put it bluntly: “We’re seeing a Russian ruble weakening significantly over the long term.”