One of the frequently used barometers to assess the prospects for an economy is the value of its currency. The Russian ruble, like other currencies, is most commonly measured against the US dollar. Between 24th February and 2nd March, the USDRUB forex rate showed the ruble losing more than 45% in value against the greenback.
USDRUB – Daily Price Chart – August 2021 – April 2022
That price crash, from a conversion rate in the region of 75.00 to one above 115.00, has been followed by a rebound in the Russian currency and the USDRUB price dropping back to below 80.00. Anyone looking to buy dollars using rubles will now have to part with 80 rather than 115 of the Russian notes to get one buck.
Markets with price swings as extreme as this ought to only attract the most risk-aggressive investor, but lifting the lid on what factors are driving the price swings does shed light on the state of the financial markets right now. In short, sanctions and capital controls are being pitted against each other. A more salient lesson is that whilst it is possible to influence the price of a particular market, such actions can only be effective for a limited time.
Factors Weakening the Price of the Ruble
The trigger for the initial slump in the price of the ruble was the imposition of sanctions on crucial elements of the Russian economy. These resulted in the IMF downgrading their 2022 growth forecast for the Russian economy from +2.8% to a contraction of between 10 – 15%. With certain Russian exports banned, there is less need for international clients to buy the RUB required to complete transactions. Following the classic laws of supply and demand and fundamental analysis, holding rubles became less attractive, and their value plummeted.
The Rebound in the Ruble
The reaction of the Russian authorities was to introduce capital controls. Those firms still exporting products such as oil and gas are now required to convert any payments made in currencies other than rubles into the local currency as soon as funds hit their domestic bank accounts.
At the same time, the $600bn in cash reserves that Russia has built up are being used to buy rubles in the open market, and the central bank put interest rates up to 20%, two moves which have further supported the currency.
Oil and USDRUB
The politically based interventions have had a sudden and dramatic influence on the USDRUB conversion rate, but history points to such measures becoming less effective over time. This introduces the role of one of the long-burn drivers of the USDRUB forex rate, Russian energy supplies.
Russia is the world’s largest producer of oil, and much of its oil and gas is pumped to Western European countries such as Germany, which have limited means of switching to alternative supplies in the short term. The spike in geopolitical uncertainty seen in Q1 of 2022 has sent prices of energy commodities spiralling. Bloomberg expects Russia to earn $321bn from energy exports this year, up by a third by 2021.
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