ALEXANDER NEMEN / AFP via Getty Images
Last week, Russia said it wanted European countries that buy its natural gas to make their payments in rubles, not dollars or euros. A month ago, this might have seemed like a pretty good deal: the ruble fell 40 percent to 139 rubles a dollar after Russia’s invasion of Ukraine.
However, after this minimum on March 7, the Russian ruble recovered sharply. At the time of writing, it was trading at 84 per dollar, which is exactly where it was at the time of the invasion. And it’s not a rebound of a dead cat. It was the sharp and steady recovery that made the ruble the most efficient currency in the world in March.
And yet, all the sanctions imposed since the beginning of the war are still in force, and in some cases they are even tougher. So how did the Russians manage to revive their currency?
A hole in the gang’s wall
There are several components to this recovery. First, thanks to the huge hole in the sanctions imposed by the coalition of allies with the United States: natural gas. The sanctions are intended to limit Russia’s ability to buy foreign currency, in particular dollars and euros. But some European countries continue to buy Russian gas because they have become so dependent on it, and there are not enough alternative suppliers to meet demand.
Add to this the rise in oil and natural gas prices and the stability of Russia’s trade relations with other major economies such as China and India, and the result will be a stable inflow of foreign currency into Russia. This eased concerns that Russia would become insolvent, and helped put the floor under the ruble.
There is another hole in the sanctions that is worth mentioning: the allocation of sovereign debt. One of the biggest and harshest sanctions against Russia has been the freezing of its foreign accounts. In banks around the world, Russia has about 640 billion euros, dollars, yen and other foreign currencies. About half of that number is in the United States and Europe. Sanctions have blocked Russia’s access to this money … except when it comes to paying interest on its sovereign debt. The US Treasury Department has left a window open so that financial intermediaries can process payments for Russia. It is planned that this window will close this month, but it was a great help for Russia. Without this, Russia may need to raise dollars by selling rubles, which would put downward pressure on the currency. And if she had not been able to raise those dollars, she would have defaulted.
These are the sensitive external factors that contribute to the recovery of the ruble. Internal factors are somewhat less corporeal. On February 28, the Central Bank of Russia raised rates to 20 percent. Any Russian who may have been tempted to sell his rubles and buy dollars or euros now has a great incentive to save that money. The less rubles go up for sale, the less pressure on the currency.
Next is the government’s demand to Russian companies that 80 percent of all money earned by these companies be transferred in rubles. This means that a Russian metallurgist, who earns 100 million euros by selling steel to a company in France, must turn around and exchange 80 million of those euros for rubles, regardless of the exchange rate. There are many Russian companies that do big business with foreign companies, earn a lot of euros, dollars and he. The order to convert 80 percent of these revenues into rubles creates a significant demand for the Russian currency, which helps maintain it.
The Kremlin has also issued a decree banning Russian brokers from selling securities owned by foreigners. Many foreign investors own Russian corporate stocks and government bonds, and they will, of course, want to sell these securities. By banning these sales, the government is strengthening stock and bond markets and keeping money inside the country, helping to keep the ruble from falling.
Russian citizens themselves have been targeted by the government, which has restricted their remittances. The initial ban said all foreign currency loans and transfers should be suspended. This served to keep foreign currency in the country and prevent Russians from selling rubles for dollars or euros, which would put pressure on the currency. These restrictions have been eased somewhat recently to give a respite to Russians who regularly send money abroad, but hard currency conversion is limited to just $ 10,000 for individuals by the end of this year.
Perhaps the biggest factor contributing to the growth of the ruble is Vladimir Putin’s risky move, which we mentioned at the beginning of the bulletin: he told some Russian natural gas buyers that they now have to pay gas bills in rubles. Natural gas contracts usually require payment in euros or dollars, and countries that buy natural gas – the European Union, the United States, Canada, Australia, New Zealand, Japan, South Korea and Taiwan, usually do not have large reserves of rubles for hands. So, if Putin manages to force these countries to pay in rubles, they will have to go out and buy them. There are many of them. Demand for the currency will grow, and the value of the ruble will naturally grow. It was the expectation of this growth that helped increase the market value of the ruble.
We can say that these steps of the Russian government are a common thing. After all, the Federal Reserve is constantly adjusting interest rates. The US Treasury Department has restrictions on remittances to some countries. And why shouldn’t a country stipulate in what currency it receives payments? And aren’t governments responsible for protecting their currencies? All fair moments. But what the Russian government is doing here is more than protecting the currency: it is manipulating the ruble market and the demand for production that would not otherwise exist.
Some observers say Russia has actually created the Potemkin currency. This is a reference to Grigory Potemkin, who was appointed governor of Crimea after his accession to Catherine the Great in 1784. Eager to show Catherine how successful he was in relocating Crimea by Russian villagers, Potemkin allegedly built and inhabited a mobile village, which he assembled, dismantled, and then reassembled along her route as she surveyed the region. The governor of the Central Bank of Russia Elvira Nabiulin, in fact, plays Potemkin with Putin’s Catherine, using a number of tools to make the ruble look like a currency of value, while in fact very few people outside Russia want to buy one ruble if not necessarily, and many people in Russia also don’t really want to.
There are great risks to all this government intervention. The protectionist measures taken by the Central Bank of the Russian Federation are in fact a kind of bridge for the ruble. If Russia manages to come to a resolution on Ukraine, which provides for the lifting of sanctions and the resumption of trade relations with the West, then after the lifting of measures, the ruble may retain its current value. But if these measures are repealed without a resolution, the ruble could collapse, hit the economy, jump inflation and cause great pain to the Russian people. And the measures – at least some of them – will eventually have to be repealed. Russian borrowers can not pay long interest rates of more than 20 percent, if they can even think about loans at this price. Growth will be stifled – the Russian economy is already expected to shrink by more than eight percent this year – and the industry will decline.
Apparently, the biggest risks are associated with Putin’s gas move. As we have said, all natural gas contracts that buyers have signed with Russia say that payment will be made in euros, dollars or other foreign currency. Putin cannot simply cross out “dollars” or “euros” and write “rubles”, where those contracts stipulate how to pay. He must reconsider the terms of these contracts. And if he does, it is likely that these countries will drastically reduce the amount of natural gas they buy in Russia.
Russia is the world’s largest producer of natural gas and the largest exporter, but it is not the only source and buyers of Russian gas can switch to new suppliers. The United States is already shipping to Europe. We are talking about supplies from the UK, Norway, Qatar and Azerbaijan. Israel is considering the idea of a pipeline. Countries that buy large volumes of Russian gas probably wouldn’t be able to wean off it overnight, but if Russia insists on the move, it risks turning one of its biggest revenue streams into a trickle. In short, the problem with creating a facade – as Russia has done with its currency – is not only that it can fall, it can fall on you.