Russia’s ruble recovers despite western sanctions

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Moscow (AFP) – After a historic collapse in the wake of Russia’s military offensive in Ukraine, the ruble has staged a spectacular recovery, helped by tight capital controls and energy exports.

However, analysts say that success is in many ways artificial and bodes ill for the health of Russia’s economy.

The February 24 military operation unleashed unprecedented Western sanctions on Moscow, sending the ruble into free fall and accelerating already high inflation.

Four days after President Vladimir Putin sent troops to the pro-Western country, the central bank hiked interest rates to more than 20 percent to prop up the financial system.

In a surprise move on Friday, the central bank cut interest rates to 17 percent and said risks to financial stability “had stopped increasing for now.”

“It is clear that the Central Bank of Russia believes that the Russian economy is now emerging from the most acute phase of its crisis and that such tight monetary conditions are no longer justified,” said Liam Peach, emerging Europe economist at Capital Economics.

The ruble’s return to levels last seen before Moscow’s military campaign began is a sign the economy may be adjusting to sanctions, economists say.

– “Exports are solid” –

Sofya Donets, chief economist at Renaissance Capital, said the ruble’s rebound was helped by an unprecedented trade surplus amid high energy prices.

Chart showing the international reserves of the Central Bank of Russia 1992-2022 Gal ROMA AFP/file

“There has been a drop in imports, partly due to sanctions, partly due to insecurity and logistical disruption,” she told AFP.

“But exports are solid, and with commodity prices strong, we expect a historically high account surplus of $20-25 billion in March.”

Oil and gas, Russia’s main exports, continue to flow abroad, filling Russia’s coffers.

The United States has banned Russian oil imports and the EU has imposed a ban on Russian steel imports, but these penalties have largely spared key Russian exports.

“It only affects five percent of Russian exports, so it’s not that much,” Donets said.

Robust exports were complemented by tight capital controls put in place by the central bank.

The West froze about $300 billion in Russian foreign exchange reserves abroad, a move Foreign Minister Sergei Lavrov has described as “stealing”.

To counter the sanctions, export companies were forced to sell 80 percent of their export earnings to buy rubles.

Russians have also been banned from withdrawing or taking out more than $10,000 in foreign currency, and foreign investors have been banned from selling Russian assets.

Late on Friday, the central bank eased some restrictions and said that from April 18 it would lift the ban on buying dollars and euros introduced in early March.

– ‘PR campaign’ –

However, the ruble’s rapid recovery does not mean a strong economy, analysts said.

“Russian equities and the ruble currently remain decoupled from global macro factors and news flow due to capital controls,” Alfa Bank said in a statement.

The lender estimates that the ruble will trade at around 80-85 to the dollar in the near term.

Economists believe the worst economic fallout from the sanctions is yet to come and expect Russia, which relies heavily on imports of manufacturing equipment and consumer goods, to plunge into a deep recession.

Russia’s inflation rate hit 16.7 percent on a yearly basis in March, the state statistics agency said on Friday, a level not seen since 2015, while food prices rose even more.

Capital Economics pointed out that the 7.6 percent monthly increase in consumer prices in Russia in March was “the highest monthly increase since the 1990s”.

Renaissance Capital analysts predict annual inflation will peak at 24 percent this summer.

Donets said that “the market is in a sense destroyed”.

“We now have a closed financial system,” she added.

“Where would the ruble be if there were no capital controls? It’s very difficult to say, there was no precedent.”

Timothy Ash, emerging markets strategist at BlueBay Asset Management, was blunt, saying Bank of Russia was “heavily managing/manipulating this”.

“It’s not a liquid market,” he told AFP in comments via email.

“This is a PR campaign by the Central Bank of Russia as a tool of the Kremlin.”

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