Is Putin a Magician??? |
The US Dollar has crashed this year losing a whopping 69% to the Russian Ruble in 5 Months since the Ukrainian Invasion, despite Crippling Sanctions by the world’s major economies led by US.
Infact, the Rubble is currently the world’s best performing currency amongst the G8.
What’s Putin’s secret????
Even as Russia marks a historic default on its debt, the nation’s currency is gaining strength. The ruble hit a new high against the dollar this week, continuing its streak as the best-performing currency in the world this year.
Three months after the ruble’s value fell to less than a U.S. penny amid the toughest economic sanctions imposed on a country in modern history, Russia’s currency has mounted a stunning turnaround. The ruble has jumped 45% against the dollar since January, with one dollar worth 53.45 rubles as of last month.
It’s an unusual situation,” said Jeffrey Frankel, professor of capital formation and growth at the Harvard Kennedy School.
Normally, a country facing international sanctions and a major military conflict would see investors fleeing and a steady outflow of capital, causing its currency to drop. But Russia’s unusually aggressive measures to keep money from leaving the country, in combination with a dramatic rise in fossil-fuel prices, are working to create demand for the ruble and pushing up its value.
The ruble’s resiliency means that Russia is partly insulated from the punishing economic penalties imposed by Western nations after its invasion of Ukraine, although how long that protection will last is uncertain.
At the same time, Russia appears to have defaulted on its international debts for the first time in over a century. After a key payment deadline passed on Sunday, bondholders said they had not been paid, according to Bloomberg and Reuters.
Why the ruble recovered
The main reason for the ruble’s recovery is soaring commodity prices. After Russia invaded Ukraine on February 24, already high oil and natural gas prices rose even further.
“Commodity prices are currently sky-high, and even though there is a drop in the volume of Russian exports due to embargoes and sanctioning, the increase in commodity prices more than compensates for these drops,” Tatiana Orlova, lead emerging markets economist at Oxford Economics, told MoneyWatch recently.
Russia is pulling in nearly $20 billion a month from energy exports. Since the end of March, many foreign buyers have complied with a demand to pay for energy in rubles, pushing up the currency’s value.
How effective have sanctions been against Russia?
At the same time, Western sanctions and a wave of businesses leaving the country have led to a drop in imports. In the first four months of the year, Russia’s account surplus — the difference between exports and imports — rose to a record $96 billion.
“We have this coincidence that, as imports have collapsed, exports are soaring,” Orlova said.
Closing the floodgates
Russia’s central bank has also propped up the ruble with strict capital controls that make it harder to convert it to other currencies. That includes a ban on foreign holders of Russian stock and bonds taking dividend payments out of the country.
“That used to be quite a significant source of outflows for currency from Russia — now that channel is closed,” Orlova said.
Meanwhile, Russian exporters are required to convert half of their excess revenues into rubles, creating demand for the currency. (The conversion requirement was 80% until the end of May, when it dropped to 50%.) On top of that, Orlova noted, it’s extremely difficult for foreign companies to sell their Russian investments, another obstacle to capital flight.
“Although we are seeing these announcements that Western companies are leaving Russia, quite often they simply have to hand over their stakes to their local partners. It doesn’t actually mean they are being paid a fair price for their stakes, so they are not moving large amounts of cash from the country,” she said.
All these factors are creating demand for rubles, boosting the currency’s value.
“While this is not a free market-determined exchange rate, ruble stability is at the same time ‘real,’ in the sense that it’s driven by Russia’s all-time high current account inflows,” Elina Ribakova, deputy chief economist at the Institute of International Finance (IIF), said via email.
Anilarge Reporters 
You must be logged in to post a comment.