- The Russian ruble has recovered to the level it was before Vladimir Putin invaded Ukraine, although the economy remains in a sorry state.
- The recovery is due to strict government rules that have capped sales of the ruble.
- Economists have said the sanctions are still taking a heavy toll on Russia’s economy, which is expected to shrink dramatically.
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Russia’s currency, the ruble, has recovered to the level it was before President Vladimir Putin ordered his troops into Ukraine.
Analysts have said that this does not reflect the strength of the economy, but rather the tight controls the government has imposed on the financial system and tough rules on exporters.
“It’s not a free market anymore,” Lee Hardman, a currency analyst at Japanese bank MUFG, told Insider.
The currency fell to a record low of around 140 to the dollar shortly after the country invaded Ukraine in late February. Investors dumped the ruble as Western governments imposed tough sanctions that cut off much of Russia’s foreign exchange reserves.
But it has since risen above levels just before the invasion began, trading at around 79 to the dollar on Friday.
Here’s what’s up.
Why did Russia’s currency appreciate?
A key weapon in the government’s financial arsenal has been capital controls, rules that limit how much money can move in and out of the country.
The government has imposed strict limits on how much people can take out of Russia and restricted the sale of the ruble. For example, Russians have been banned from withdrawing more than $10,000 worth of foreign currency or transferring cash to foreign accounts. In addition, foreign investors are not permitted to sell domestic financial assets.
Russia has also ordered foreign-earning exporters to convert 80% of their foreign-earned money into rubles. Given that Russia still makes a lot of money from oil and gas exports, this was a key support for the currency.
The central bank was also active, doubling interest rates to 20% after the ruble started falling in late February before cutting them to 17% on Friday. This has encouraged Russians to keep their rubles in their banks.
Are the sanctions still working?
The ruble’s recovery is somewhat embarrassing for US President Joe Biden, who described it as “debris” after its plunge in March. But the government’s draconian restrictions mean that the currency’s rate is not a reliable economic signal.
“Guys, with capital controls, I can fix the currency at about any rate I want,” economist Daniela Gabor tweeted on Wednesday.
Forecasts say 2022 will be a bad year for Russia as sanctions trigger a slump in imports and investment.
The Institute of International Finance expects Russia’s gross domestic product — the most common measure of the size of an economy — to contract by 15% this year, erasing 15 years of growth.
Consulting firm Capital Economics expects GDP to fall by 12% and unemployment to nearly double from 4.1% to 8%. Goldman Sachs believes sanctions and “self-sanctions” by western companies will cause imports to fall by 20% and exports by 10% this year.
Hardman said, “These types of economic conditions would justify a weaker currency, but obviously the government has put capital controls in place to prevent that.”
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