Market: What hides the strong appreciation of the ruble against the euro and the dollar

(BFM Bourse) – The Russian currency has recorded significant gains since the start of the year against major Western currencies. But far from demonstrating that the economy is impervious to Western sanctions, this rise is largely artificial.

The ruble is very expensive and the Kremlin has had good luck using it to ensure that Western sanctions do not manage to hurt the Russian economy. Since the start of the year, the Russian currency has gained more than 23% against the dollar and nearly 40% against the euro. The ruble even hit a seven-year high against the US currency in June.

Admittedly, the strength of a currency is sometimes perceived as a reflection of the robustness of an economy. The best example remains the Swiss franc, the dearness of which has often been erected as a symbol of Swiss prosperity. But this image of Epinal is actually misleading. In the case of Russia, the jump in the ruble in no way reflects the good health of the economy.

“For many analysts, the Russian government has done much more than defend its currency: it is manipulating the ruble market and creating demand that would not otherwise exist. Indeed, some observers criticize the Russian central bank for using a whole range of tools to make the ruble look like a valuable currency, when in fact very few people outside of Russia want to buy a single ruble unless they absolutely have to” , explains Charles-Henri Monchau, director of investments at Banque Syz.

Driven by gas, oil, India and China prices

The appreciation of the ruble is indeed due both to simple market mechanisms and, for many, to distortions. In concrete terms, Russia’s current account surplus has increased very sharply, mainly due to increases in the value of gas and oil exports. After reaching a peak of 37.6 billion dollars in April, this surplus certainly fell to 28 billion in July. But this surplus remains three times higher than that of the same month of 2021.

Although Russia recently decided to cut off the Nord Stream 1 gas pipeline, and therefore no longer supply Europe, it had not previously experienced any great difficulty in finding customers for its gas and oil.

“The sanctions were originally designed to restrict Russia’s ability to acquire foreign currency – dollars and euros in particular. But several European countries continue to buy Russian gas because they are dependent on it and because there are not enough alternative suppliers to meet demand”, recalls Charles-Henri Monchau.

“Let us add that the countries which did not vote for the sanctions – including China and India – have strongly increased their imports of natural gas (and oil). The effect of ‘new customers’ + rise in prices has more than compensated for the reduction in exports to Europe”, he develops. This supports the local currency all the more as Russia forces its buyers to pay for imports in rubles.

Faced with the increase in the value of its exports, imports from Russia are melting, weighed down by Western sanctions.

Capital controls

Beyond foreign trade, the ruble is also artificially boosted by the capital controls put in place by Moscow since the start of the war, via a series of measures.

“Companies are still obliged to convert at least 50% of their foreign currency income into rubles, even if this threshold has been slightly lowered, since it was at 80% between March and July”, explains an economist specializing in Russia who requested anonymity for professional reasons.

This is obviously not the only device put in place by Moscow. “The Kremlin also issued a decree prohibiting Russian brokers from selling foreign-owned securities. Many foreign investors own shares of Russian companies and government bonds and wanted to sell their holdings following the announcement of Russian invasion and sanctions,” underlines Charles-Henri Monchau.

Individuals were not spared. “Russian citizens themselves have been targeted by the government, as the Kremlin banned them from transferring money abroad. The original ban stated that all loans and currency transfers were to be suspended,” explains again Charles-Henri Monchau. “These restrictions have been eased somewhat recently, but transfers are limited to $10,000 per month for individuals until the end of this year,” he said.

The expert also highlights “another strong measure” which “went relatively unnoticed in the Western media”: the fact that the Bank of Russia has resumed its purchases of gold at a fixed price of 5,000 rubles for 1 gram between March 28 and June 30.

“This operation allows the central bank not only to peg the ruble to gold but also to set a floor price for the ruble in dollar terms (since gold trades in US dollars). The floor price is estimated at approximately 80 rubles to the dollar (5,000 rubles divided by 62 dollars per gram of gold). This operation raises the possibility of a return to the gold standard for the first time in more than a century”, he details.

The ruble is no longer a free-trade currency

Other measures going in the direction of a rise in the ruble: since the invasion of Ukraine, the Russian central bank can no longer, because of Western sanctions, buy the major Western currencies (dollar, euro, yen, pound) to weaken the rouble, as it did from 2017 to February 2022, whenever oil prices rose above $40 a barrel.

All this very clearly weakens the status of the rouble, which can even hardly be described as an international currency. “As things stand, traders no longer regard the ruble as a free-trade currency. Capital controls imposed as a result of Western sanctions mean the exchange rate is effectively managed,” Charles-Henri points out. Monchau. “Many exchange offices have even stopped trading the ruble on the grounds that its value displayed on the screens is not the price at which it can be traded in the real world,” he continues.

Moreover, this appreciation does not help the Russian economy. “The strong ruble penalizes the Russian economy: due to its strength and the obligation imposed on other countries to pay for their imports in Russian currency, budgetary revenues linked to the sale of raw materials are decreasing, which poses a problem “, underlines the anonymous economist quoted above.

According to the International Monetary Fund (IMF), Russian gross domestic product is expected to contract by 6% this year.

[Note: les taux de change ont été arrêtés vendredi en milieu d’après-midi]

Julien Marion – ©2022 BFM Bourse

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