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Despite sanctions, the Russian ruble has reached its strongest level in seven years

Taken on March 8, 2022 in Krakow, Poland, this multiple-exposure illustrated photo shows a Russian 1-ruble coin and a Russian flag displayed on the screen.

Jakub Porzycki | Nurphoto | Getty Images

Russian Ruble Wednesday’s dollar reached $ 52.3, the strongest level since May 2015. The currency in Moscow on Thursday afternoon traded to the greenback at 54.2, slightly weaker, but still approaching its seven-year high.

This is a world away from the plunge to $ 139 in early March when the United States and the European Union began imposing unprecedented sanctions on Moscow. Ukrainian invasion..

The surprising surge in the ruble over the next few months is cited by the Kremlin as “evidence” that Western sanctions are not working.

“The idea was clear: it crushes the Russian economy violently,” said the Russian president. Vladimir Putin Last week, he said at the annual St. Petersburg International Economic Forum. “They didn’t succeed. Obviously, it didn’t happen.”

In late February, four days after the Ukrainian invasion began on February 24, following the first fall of the ruble. Russia more than doubled the country’s major interests It will be 20% from the previous 9.5%. Since then, the value of the currency has improved by lowering interest rates three times to reach 11%. In late May..

The ruble is actually so strong that the Central Bank of Russia is actively taking steps to weaken it, fearing that it will make the country’s exports less competitive.

But what is really behind the rise in the currency and can it be maintained?

Russia is raking record oil and gas revenues

The reason is simply surprisingly high energy prices, capital controls and sanctions themselves.

Russia World’s largest gas exporter And that The second largest exporter of oil.. Its main customer? The European Union is buying billions of dollars worth of Russian energy a week and at the same time trying to punish it with sanctions.

As a result, the EU is in a difficult situation. The EU is now exponentially sending more money to Russia in the purchase of oil, gas and coal than it has sent aid to Ukraine. This helped fill the Kremlin battlefield.And with Brent crude oil Despite many Western countries curbing Russia’s oil purchases, prices are 60% higher than this time last year, but Moscow is still making record profits.

Russian President Vladimir Putin and Defense Minister Sergei Shoigu celebrate the anniversary of the start of the Great Patriotic War against Nazi Germany in 1941 at the tomb of an unknown soldier near the Kremlin wall in Moscow, Russia. Attend the laying ceremony. 22nd 2022.

Mikhail Metsel | Sputnik | Reuters

In the first 100 days of the war between Russia and Ukraine, the Russian Federation earned $ 98 billion from fossil fuel exports. according to Energy and Clean Air Research Center, a research institute based in Finland. More than half of these revenues come from the EU, which is about $ 60 billion.

According to Eurostat, many EU countries are keen to reduce Russia’s reliance on energy imports, but this process can take years. By 2020, Brock relied on Russia for 41% of its gas imports and 36% of its oil imports.

yes EU passed groundbreaking sanctions package in May By the end of this year, Russia had partially banned oil imports, but landlocked countries such as Hungary and Slovenia had no access to alternative oil sources that were transported by sea, resulting in a significant exemption from pipeline oil. Was done.

“Russia has a record current account surplus in foreign exchange, so the exchange rate seen in the ruble is there,” Max Hess, a fellow at the Foreign Policy Institute, told CNBC. Its revenue is mainly expressed in dollars and euros through a complex ruble exchange mechanism.

“Russia may currently have slightly less sales to the West, but because the West is shifting to blockages. [reliance on Russia], They still sell 1 ton at the highest oil and gas prices ever. So this is bringing a big current account surplus. ”

According to the Central Bank of Russia, Russia’s current account surplus from January to May this year was just over $ 110 billion. More than 3.5 times that period last year..

Strict capital regulations

Capital regulation, the government’s restriction of foreign currencies, plays a major role here. In addition, there is the simple fact that Russia cannot import any more because of sanctions. This means less money is spent buying things from elsewhere. ..

This is actually Potemkin’s rate, as it is very difficult to send money abroad from Russia, given the sanctions on both Russian individuals and Russian banks.

Max Hess

Foreign Policy Institute Fellow

Nick Stadtmiller, Director of Emerging Markets Strategy at Medley Global Advisors in New York, said: “As a result, capital outflows are relatively low, but exports are inflowing. The net effect of all these is a stronger ruble.”

Russia has now relaxed some capital restrictions and lowered interest rates to weaken the ruble. This is because the appreciation of the currency is actually damaging the public finances.

Ruble: Really “potemkin rate”?

Russia is currently separated from the SWIFT international banking system, blocking international transactions in the dollar and euro, leaving essentially transactions with Russia, Hess said. That is, Russia has accumulated a huge amount of foreign exchange reserves to strengthen its currency, but sanctions prevent it from being used to meet import needs.

The ruble’s exchange rate is actually the Potemkin rate, as it is very difficult to remit from Russia abroad given the sanctions on both Russian individuals and Russian banks, not to mention Russia’s own capital restrictions. “Hess said.

In political economy, Potemkin refers to a fake village allegedly built to give Empress Catherine II the illusion of prosperity.

“Yes, the paper ruble is pretty strong, but that’s the result of a plunge in imports, what’s the point of building up foreign exchange reserves? But to buy what you need for your economy from abroad Are you going? And Russia can and don’t. “

On May 25, 2022, people line up near the euro and US dollar rates on the ruble sign at the entrance to the exchange in Moscow, Russia. Russia approached default on Wednesday after the US Treasury revoked a major sanctions exemption.

Constantine The Bragin | Getty Images

“We really have to look at the underlying problems of the Russian economy, including the import of craters,” Hess added. “Even if the ruble says it has high value, it will have a devastating impact on the economy and quality of life.”

Does this reflect the actual Russian economy?

Does the ruble’s strength mean that Russia’s economic fundamentals are healthy and have escaped the impact of sanctions? According to analysts, it’s not that fast.

Themos Fiotakis, Head of Forex, said: Study at Barclays.

The Russian Ministry of Economy said in mid-May: Unemployment rate is expected to reach close to 7% It is unlikely that it will return to levels this year and 2021 until 2025 at the earliest.

Since the beginning of the Russian war in Ukraine, thousands of international companies have left Russia, leaving a huge number of unemployed Russians.Foreign investment has been hit hard, and Poverty almost doubled in the first five weeks of the war Alone, according to Rossstat, the Federal State Statistics Service of Russia.

“The Russian ruble is no longer an indicator of economic health,” Hess said. “The ruble has skyrocketed thanks to the Kremlin’s intervention, but the carelessness of Russia’s well-being continues. Even Russia’s own statistical agency, famous for massaging numbers to reach the Kremlin’s goals. Admitted it The number of Russians living in poverty has increased from 12 [million] 21 million in the first quarter of 2022. “

“It’s very uncertain, and it depends on how geopolitics evolves and policies are adjusted,” Fiotakis said of whether the ruble could maintain its strength.

Despite sanctions, the Russian ruble has reached its strongest level in seven years

Source link Despite sanctions, the Russian ruble has reached its strongest level in seven years

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