Following the Russian invasion of Ukraine, Western economists predicted that the Russian ruble would crash. And it did, for less than a month, as holders of Russian assets scrambled to liquidate their shares. By mid-March, a combination of Russian protectionism and holes in Western sanctions helped the currency to get back on its feet. However, as Russia braces for a recession, economists doubt this improvement will last.
By March 7, less than two weeks after the first Western sanctions, the ruble had dropped from $0.012 on February 24 to $0.0072 — a 39% depreciation. Before Russia’s invasion of Ukraine, the ruble had maintained a $0.013 average since late December 2021. By April 7, however, the ruble had regained its pre-invasion value, marking a staggering 75% increase from its March low and becoming the “best-performing currency in March,” according to Business Standard.
Putin and the Kremlin have further imposed protectionist measures of their own to incentivize use of the ruble. The Central Bank of Russia has increased interest rates to 20 percent, and Putin has required that Russian companies must convert 80 percent of overseas profits into rubles. According to an NPR article from early April, this decree “creates significant demand for the Russian currency.” Additionally, foreign investors in Russian securities are barred from selling, which further bolsters Russian markets.
While the U.S., the U.K., and the European Union (EU) have attempted to thrash Russia’s economy, some Western sanctions instituted to limit Russia’s access to dollars and euros may have actually contributed to the ruble’s unforeseen return to stability. These sanctions have certainly burdened Russia’s economy, but they have failed to address Russia’s largest export: energy. Specifically, Russia exports large quantities of natural gas. The EU has banned Russian coal but has yet to issue an effective sanction on Russian oil, which would cripple the Russian economy if imposed. The EU’s hesitance is largely due to Europe’s dependence on Russian oil – 40 percent of Europe’s natural gas comes from Russia.
In the coming weeks, this reliance on Russian natural gas may prove increasingly detrimental for the West and ever-beneficial for Russia. In late March, Putin signed a decree which would require “unfriendly” countries on Russia’s list, including the U.S., the U.K., the EU, South Korea, and Australia, to pay for Russian gas in rubles, rather than dollars or euros. If Putin gets his way, and Western countries are forced to use rubles, global demand for the ruble will skyrocket.
However, some experts are unsure if the ruble’s stability will last. In a press conference on April 3, Anthony Blinken, U.S. Secretary of State, noted the Kremlin’s manipulation of the ruble, saying, “People are being prevented from unloading rubles…[which is] artificially propping up the value. That’s not sustainable.” In Russia’s battered economy, people are not willing to buy the currency on their own. Hence, when the restrictions are lifted, the value of the ruble will most likely dramatically drop with its demand.
If these restrictions are lifted, Russia may also see less revenue in response to the Kremlin’s demand for purchases of Russian oil to be carried out in rubles. The U.S. is already sending domestic oil to Europe to compensate for Russian supply. The EU may also turn to the U.K., Norway, and the Middle East for other oil sources. If Putin continues to make this demand, Russia may see its largest export reduced drastically.
Either way, Russia’s economy will likely suffer. Research from the Institute of International Finance (IIF) suggests the Russian GDP will decrease by 15 percent by the end of 2022. Elina Ribakova, the IIF’s Deputy Chief Economist, predicted recently, “Russia has not had a recession of this size since the 90s…This [will be] an unprecedented shock to the Russian economy.”
For now, the future of the ruble and the Russian economy depends greatly on how the EU decides to source its oil and how long the Kremlin can restrict Russian citizens. As of now, it is unclear exactly when the Russian ruble’s facade will fall. When it falls, Russia will need to reevaluate its plans for economic stability.
By Ned Thornton