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Why Has The Rouble Recovered Despite Western Sanctions?

Updated: May 20, 2022

Following the Russian invasion of Ukraine on February 24th 2022, the rouble immediately experienced a dramatic collapse. On March 7th Russia’s currency reached 139 roubles per US dollar, almost double last year's average of 73.5[1]. The currency continued to fall as Western countries enforced increasingly harsh economic sanctions, including restrictions on the Russian Central Bank's ability to access its vast pool of foreign reserves, which even led Russia to the verge of sovereign default.

Gazprom is a Russian majority state-owned energy corporation which supplies Russian natural gas, oil, fuel and other forms of energy to many countries around the world and Europe. In total, fossil fuels represent 60% of all Russian exports and make up 40% of Russian federal revenue [2]. Hence, to try to rescue its currency’s collapse, Russia tried to make ‘unfriendly’ receivers of Russian energy pay for it in roubles, which would push up the value of their currency. Russia ordered Poland and Bulgaria to pay in roubles for their energy supplies[3]. Yet, both countries refused, causing Russia to cut supply to those nations.

Yet most European nations, especially Germany and Italy, are still buying Russian energy and paying in Euros[4]; approximately €400 million for Russian energy are being sent to the nation daily[5]. Since this is such a colossal sum, Russia cannot afford to risk requesting payment in roubles for fear of disagreement and consequently major losses. Therefore, Russia decided an alternative tactic, to exchange all the euros it receives into roubles, increasing the currency’s worth. This works as when colossal monetary sums are exchanged into a certain currency, roubles, the demand increases, which in turn drives its FX price up. This is one of the causes for the rouble’s miraculous 'recovery'.

At the same time, Russia introduced more harsh measures to strengthen its own FX rate. The nation banned all cash purchases of euros and dollars; it introduced a 12% commission when buying foreign currency online; set $10,000 as the maximum amount an individual could withdraw from their bank account until September 9th 2022 and obliged export-focused companies to convert 80% of their FX revenue into roubles [6]. In these ways, Russia disrupted the supply-demand balance of roubles and managed to alter its exchange rate.

Though this appears to be a huge success, it is actually just an artificial recovery, as the Russian currency no longer reflects the real state of its economy. The buying power of the rouble has significantly diminished because of the nation’s increasing inflation. Prices for goods and services have soared with inflation reaching 17.8% at the end of April 2022[7]. The inflation is predominantly due to disruptions in imports and a lack of foreign components, in particular brought on by Western sanctions. In theory, an artificially stronger rouble could counteract Russia’s inflation crisis. However, inconsistency of exchange rates in banks selling foreign currencies, as well as consumer prices continuing to rise, has forecasted annual inflation to reach 27% by mid-2022[8].

The fate of the rouble is still to be determined and it is unknown for how long the rouble appreciation can be sustained. According to Ulrich Leuchtmann, an analyst at Commerzbank, "this [rouble recovery] shouldn't be taken to be the market's view on the medium to longer-term outlook for Russia"[9].



References/Further Reading

[1] [2] [3] [4] [5]


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