After Russia became the target of Western sanctions when the war in Ukraine began on February 24, through the policies of the country’s central bank, it managed to restore the strength of its local currency, the ruble.
While the dollar was pegged at 76 rubles before the Russia-Ukraine war, the Russian currency depreciated to 150 to the dollar by March 8.
However, the policies of the Central Bank of Russia and the Ministry of Finance pushed the ruble higher. To register a level of 52 against the dollar by the end of last June, the highest level for the Russian currency in the last 7 years.
At the exchange rate level, as a result of measures taken to protect the Russian banking and monetary system from Western sanctions, the ruble became the best currency in the world this year.
Typically, a country facing international sanctions and a major military conflict will see investors flee and a constant influx of capital causing its currency to fall sharply.
But Russia’s unusual measures to prevent money from leaving the country, combined with rising fossil fuel prices, have created demand for the ruble and increased its value.
Thus, the flexibility of the ruble means that Russia is partially immune from economic sanctions imposed by Western countries after the invasion of Ukraine, although it is unclear how long such protection will last.
The main reason for the improvement of the ruble in the past few months is due to the increase in commodity prices. After the Russian attack on Ukraine on February 24, the price of oil and natural gas and high grain already increased.
Russia is the world’s largest exporter of wheat, one of the world’s largest grain producers, and a major producer of rare minerals used in many advanced industries.
A few days after the start of the military invasion and after the Western sanctions began to be applied and their effects became apparent, the Central Bank of Russia started implementing this policy as a “proportionate response” to the actions of the West, including freezing the country’s assets abroad. . .
Russia’s central bank has prevented capital outflows that might enter the economies of “unfriendly countries,” including by preventing the sale of foreign-owned financial assets within Russia, which they are unable to sell today, or the transfer of their prices abroad. . This country, and in general the policies of the Central Bank of Russia aim to prevent any outflow of capital from the country, but a precise policy may be under development during the current crisis.
Russia is one of the most important exporters of oil and gas in the world, and this issue is especially important for European countries that are highly dependent on Russian gas.
There has been a lot of talk lately about the possible effects of Russian oil and gas cuts on their prices, especially with the significant gains since the war, as oil prices remain above $100 a barrel. Gas has also seen a significant increase in its price.
The whole world, and especially Europe, is suffering from the possibility of Russian oil and gas supply being cut off or reduced and what this means for prices.
But this is not the only way for Russia to benefit from its energy weapon, the Russian central bank has also found other ways to increase the demand for the ruble in an “artificial” way and help to increase its price against the dollar. through Russian gas
According to the American newspaper Wall Street Journal, at the end of last February, the Central Bank of Russia forced Russian energy exporting companies to transfer 80% of the value of their sales to Russian rubles, which means that they will pay the central bank. – although indirectly – what they have in dollars and euros, and the central bank gives them the same value in rubles.
This trend actually means an increase in the demand for the ruble in the market and, as a result, an increase in its price, and this means that Russia not only limited the sale of the ruble and prevented an increase in its supply, but also significantly increased the demand for it. have given. Even if this method was artificial and did not reflect the real desire of investors to buy the ruble or the financial assets designated in it.
But Russia didn’t stop there, Russian President Vladimir Putin said he would force “unfriendly” countries importing Russian gas to buy gas in rubles instead of paying for it in euros and dollars.
In the three weeks of the war, the EU alone imported $17 billion of Russian energy, imagine if that demand were all transferred to rubles? This means that due to the high demand for the ruble in the world market that Putin’s enemies have to offer, the value of the ruble will increase significantly against other currencies. If they want the flow of energy to continue.
However, this excessive strength of the ruble created a crisis for the government, which is looking to increase its revenues in the local currency, given that most of its expenditures are also made in the local currency.
Russia is an exporter of traditional energy resources, averaging 5 million barrels of crude oil and about 2.8 million barrels of its derivatives per day, plus 235 billion cubic meters of natural gas without coal.
The average income of the Russian government from the sale of energy, mainly in foreign currency, is about 350 billion dollars annually.
From a technical point of view, this figure is very acceptable for the country’s fiscal policy makers, but due to the nature of the expenditures made in the Russian currency, changes in the ruble exchange rate represent revenues.
For example, before the war in Russia, one billion dollars was equal to 76 billion rubles, but today the same billion dollars is spent on 53 rubles, that is, income in local currency has decreased by 23 billion rubles.
It is the excessive strength of the ruble that has created challenges for the Russian government as it seeks the means to achieve a price that is right for itself and the country’s non-oil export sector.
Usually, countries that wish to increase exports seek a “relatively weak” currency to increase export competitiveness with other countries around the world.
During the presidency of former US President Donald Trump, he repeatedly accused China of weakening its currency in order to increase export competitiveness. It is a controlled currency devaluation tool.
Source: Lebanon Debate
