President Biden bragged on Twitter on March 26 that “as a result of our unprecedented sanctions, the ruble was almost immediately reduced to rubble.” It was an ill-timed tweet. The Russian currency did crash in February after sanctions were imposed, but by the time Biden exulted, it had already regained lost ground. It’s now worth about 1.2 cents, which is down from 1.3 cents before the war but well above its wartime low of less than 0.8 cents.
What does the ruble’s 50 percent rise from its nadir tell us? Does it mean that Russia’s economy is holding up better than expected and that sanctions haven’t worked? That would be bad news, because it would indicate that Russia has abundant means to continue its invasion of Ukraine. “The strength in the ruble is reinforcing the argument for those who think that we need to take greater steps on the energy side,” making it harder for Russia to sell oil and gas, Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security, told Politico. “It’s definitely increasing that political pressure.”
The reality is that Russia’s financial position is stronger in the short term than many expected but still weak in the long term. Some of the actions that Russia has taken to prop up the ruble are taking its financial system back to the way it was under the Union of Soviet Socialist Republics, which crumbled in 1991.
For the past couple of decades the ruble has been freely and readily traded around the world, its value determined by the forces of supply and demand. This convertibility gave Western investors confidence to invest in Russia and do business with Russian companies. But that era is over, at least for now. To prop up the ruble’s value, the Russian government has at least temporarily shut down the free market in foreign exchange.
“The ruble is not convertible anymore,” Sergey Aleksashenko, who was deputy finance minister and then first deputy chairman of the Central Bank of Russia in the 1990s, told me. “It’s like 1993 or 1994.”
One reason currency experts were bearish on the ruble early in the war was that Russia’s reserves of foreign currencies held outside the country had been frozen. Ordinarily, Russia would spend those reserves to buy up rubles when the ruble was weak. With those reserves no longer accessible, it appeared that its central bank had become toothless.
But Russia doesn’t urgently need access to its foreign-exchange reserves because for now, at least, it has no shortage of dollars, euros and other foreign currencies. It is continuing to export oil and gas in large volumes, and the war-related spike in prices has only increased its revenues. On April 1, economists for Bloomberg predicted Russia’s energy export earnings would increase by more than a third in 2022.
And while more hard currency is flowing in, less is flowing out. Western nations are punishing Russia for its invasion of Ukraine by cutting off sales of many products, both consumer and industrial goods. And Russian authorities are clamping down on imports that would use up foreign exchange. The upshot is that Russia’s current account — the broadest measure of trade in goods and services plus investment income — is headed for a record surplus this year, according to the Institute of International Finance.
Even though Russia has plenty of foreign exchange at the moment, authorities are placing controls on it in case things get worse. Ordinary citizens can no longer take euros and dollars out of the country in large quantities. The central bank is requiring 80 percent of euros, dollars and other hard currencies that enter Russia to be converted into rubles, either on a Moscow exchange or through an authorized bank. The central bank then directs those hard currencies to the Ministry of Finance and private banks, which use them to repay foreign debt, and to companies that the bank decides should be allowed to import products.
The Kremlin is also requiring that unfriendly nations settle their purchases of natural gas (not oil so far) in rubles. They can pay in euros, dollars or whatever other currency is specified in the contracts, but 100 percent of those currencies will be converted into rubles by Gazprombank (the bank that serves Gazprom, one of the world’s biggest gas producers) at the official exchange rate to complete the transaction. “The anticipation of this policy has changed many traders’ outlook on the ruble,” Charles Lichfield, deputy director of the Atlantic Council’s GeoEconomics Center, told me.
Germany and Italy, the nations most affected by this requirement, have been pushing back against the Russian demand, claiming that it violates their contracts. “Right now there’s a real game of chicken,” said Jane Foley, a currency strategist in London for Rabobank of the Netherlands.
Propping up the ruble, and proving Biden’s rubble remark wrong, “is a very important propaganda signal,” Sergei Guriev, a professor of economics at Sciences Po in Paris who ran the New Economic School in Moscow from 2004 to 2013, told me.
Also politically valuable to Putin is Russia’s insistence on settling oil and gas transactions in rubles rather than dollars. “Putin is saying: ‘I want to impose my rules. I won’t be a rule taker. I will be a rule maker. I want you to settle in rubles,’” Aleksashenko said.
Still, shutting down the ruble’s convertibility can’t insulate Russia from market forces forever. The sanctions are already pushing up the inflation rate and will increasingly cause shortages of key components for manufacturers, Aleksashenko said. The currency will come under renewed pressure as Russia faces big payments on debt denominated in foreign currencies, Foley said. The ruble will also face downward pressure if Russia allows foreign companies that are pulling out of the country to sell assets and cash out, she said.
Then there’s brain drain. “Everybody I know is trying to run away” from Russia, Guriev said in March, in a Princeton video seminar. Lichfield told me: “The economic outlook for Russia is still very gloomy. The fact that capital controls have been reimposed has negative implications for Russia’s future.”
Bottom line: Russia is paying a heavy price for its invasion of Ukraine, no matter what the ruble’s value seems to indicate.
The New York Times
