How Russian currency had the highest appreciation in the world during the war

Contrary to all expectations, the Russian currency has become the world’s best-performing currency against the dollar so far this year, even outperforming the Brazilian real — which has also done well.

Not even the toughest economic sanctions in modern history imposed by the US and Europe in response to the invasion of Ukraine have been able to stem the rise of the Russian currency.

Just two months after the ruble’s value dropped sharply to less than a US cent, the currency took a surprising turn.

On March 7, the currency reached an all-time low of 0.007 rubles per dollar. But now the Russian currency has appreciated by approximately 15% against the US currency and is trading around 0.016.

The reason, experts say, is the tight capital controls imposed by the Kremlin that — when the war with Ukraine began — caused Russians to queue at ATMs in search of dollars.

The ban on Russian citizens from selling rubles to buy foreign currencies was described by US Secretary of State Antony Blinken as currency manipulation.

These controls served to freeze much of Russia’s foreign exchange reserves at a time when the country most needed these resources, both to compensate for the exodus of investment and capital and to finance the military invasion of Ukraine, which has been longer than initially planned. planned by the Kremlin.

The cases of Turkey and Argentina

What is unexpected about this recovery is that other countries, such as Turkey or Argentina, which have imposed similar measures, have had completely opposite results — with disastrous consequences for their economies.

Both currencies hit record lows and are still struggling to recover today.

After becoming aware of international sanctions, the Kremlin began to adopt unprecedented measures for generations that did not live in the time of the Soviet Union.

“The Russian central bank has been forced to dramatically raise interest rates and tighten capital controls in response to Western sanctions,” Ben Laidler, global markets strategist at investment platform eToro, told BBC News Mundo, the Spanish-language service. from the BBC.

“Interest rates more than doubled to 20%. Russian exporters were forced to convert 80% of their foreign income into rubles, and people were limited in terms of how much they could transfer abroad,” he says.

One sanction that most impacted Russia was the freezing of overseas accounts.

Another defensive measure for the Russian currency was to require natural gas buyers to pay in rubles rather than dollars or euros.

Strategic retaliation against Europe

European countries are heavily dependent on Russian gas, and despite the search for alternative energy sources, the European Union’s project to shut off supplies from Russia will take years to complete.

Germany, one of the biggest customers of Russian state-owned gas Gazprom, has already agreed to pay in rubles along with other major European buyers.

“Russia’s decision is a strategic retaliation against the EU, taking advantage of its power as the main supplier of natural gas to Europe. The Old Continent received around 40% of its gas from Russia before the war in Ukraine”, explains Levon Kameryan, analyst at Scope Ratings.

Finally, higher commodity prices also helped a lot. More expensive oil means Russian customers will now have to pay more dollars per barrel and therefore need more rubles.

short term solutions

However, experts point out that all three factors — tight capital controls, higher interest rates and higher commodity prices — have only mitigated what will be a troubled year for the Russian economy.

“The ruble’s rapid rise is a problem for exporters and some domestic producers, increasing the pressure of sanctions. It also means less revenue for the budget,” says Scott Johnson, an economist covering Russia for Bloomberg Economics.

Could the ruble recovery be seen as a thermometer for whether sanctions are working?

For Johnson, “from outside Russia it is tempting to see the ruble’s recovery as a sign that sanctions are not having the desired effect. But that is not entirely correct.”

“The appreciation was largely driven by mandatory conversion of export earnings and other capital controls, which limits cash flow from abroad,” he explains.

“The ruble paints an accurate picture of the balance of payments, but not the economy as a whole, where the outlook is bleaker,” he says.

Laidler agrees.

“The ruble’s rally may be over now. Currency strength has made Russian exports less competitive and tougher US sanctions have increased the chances of a debt default.