In late February and early March, the forex market panicked. The ruble went through unprecedented levels against the dollar: 100 rubles, then 120… until more than 140 rubles per dollar reached on March 7.
But since that day, the Russian currency has continued to strengthen, reaching 71 rubles/dollar on Friday, a record since autumn 2021, and 77 rubles/euro, its strongest level since June 2020.
For the authorities, this is excellent news, since the price of the ruble is an indicator that is highly scrutinized by the population, indicating that the sanctions are not undermining Russia’s strength. How to explain such a move, while unprecedented Western sanctions are piling up against Russia?
According to Sofya Donets, chief Russia economist at Renaissance Capital, the answer lies in an unprecedented trade surplus.
“Imports to Russia have decreased, while exports are solid and with the high prices of hydrocarbons, this gives an estimated trade surplus of 20 to 25 billion dollars in March”, a record according to the economist.
Oil and gas, Russia’s main exports, continue to flow, filling Russia’s coffers. “Of course, Russian (Urals) oil is selling at a lower price” than Brent, “but it is still higher than the 2021 price,” he notes.
However, announcements have been made. Washington has thus decreed an embargo on Russian oil, the EU a ban on the metals sectors.
“These are loud announcements, but if we look at the figures, this only affects 5% of Russian exports,” says Sofya Donets. As long as Europe, the main buyer of Russian hydrocarbons, continues with its purchases, significant income is guaranteed to Moscow.
Strong exports are complemented by draconian capital controls introduced by the Central Bank. The latter was effectively hit with unexpected sanctions: its foreign exchange reserves, close to 300 billion dollars, were frozen. However, it is this windfall that is traditionally used to defend the Russian currency in the event of a major blow.
To compensate, all exporting companies were forced to sell 80% of their export earnings to buy rubles.
Individuals have been limited to $10,000 purchased per month and cannot leave the territory with more than this amount. With most international transfers blocked and foreigners barred from selling their Russian assets, the financial market is in a vacuum.
These capital controls have worked so well to strengthen the ruble that on Friday the central bank surprised by cutting its rate without warning to 17%, after doubling it in an emergency to 20% on February 28.
“It gives them room to focus on domestic issues,” according to a note from Renaissance Capital, that is, finding a balance between runaway inflation and the looming recession. The investment bank foresees an inflation peak of 24% in the summer, before the ebb.
“The Russian stock market and the ruble remain disconnected from global macroeconomic factors and the flow of information,” Alfa bank said in a note, estimating that the ruble will hover around 80-85 per dollar in the near future.
“The ruble course has become a local instrument, there are no financial flows. The market is currently destroyed and the price of a currency is a factor in international trade”, says Sofya Donets.