‘tis but a scratch!

The ongoing  Russia- Ukraine conflict is continuously changing the economies of both the countries. Due to the unpredictable nature of the present situation, the data mentioned in this article is bound to change. In order to maintain consistency, the latest data available on 11th April has been used. 

Image source: Google Images

On March 7th 2022, the official currency of the Russian federation (ruble) had fallen to its lowest at 150 roubles per dollar. The President of the United States, Joe Biden, also made a triumphant speech on how the rouble had been reduced to rubble as a result of the sanctions imposed on Russia. Moving forward a few weeks, the rouble had gained back the value it had lost by the end of March. By 8th April, the rouble was at its highest since November 2021. The reasons for the rise and fall of the rouble lie behind the loopholes present in the sanctions imposed and steps taken by the Russian government. 

The Russian invasion of Ukraine resulted in unprecedented sanctions from the US and Europe. The measures included freezing the assets of the Russian central bank (worth $630 billion) to prevent it from accessing its foreign reserves. Russia was also removed from SWIFT, an international financial messaging system which is used to carry financial transactions across borders. Numerous companies such as McDonald’s and Starbucks suspended  their operations in Russia. Many such measures were implemented with the aim of crashing the currency and crippling the economy. However, these measures have proven largely unsuccessful due to an ace up Putin’s sleeve, namely the demand for oil and natural gas.

Despite the severity of the sanctions, there were major loopholes which Russia exploited to prevent its economic downfall— the first one being natural gas. Despite severely limiting Russia’s access to foreign currency, several European nations continue to buy Russian natural gas due to their dependence on it and the lack of viable alternatives. The US Treasury also left a window open to financial intermediaries to process payments from Russia thatbought Russia the time it needed. Without this window, Russia would have had to sell roubles for dollars which would have resulted in a downward pressure on the currency.

The boycott of Russian fossil fuels by the West wasn’t as impactful as hoped since there are two very large markets in the form of India and  China which make up for the West. India signed contracts to buy 6 million barrels of oil from Russia due to a discount of $30 per barrel of Russian oil.

The measures taken by Russia have also played a major role in the rouble’s rebound. From February 28th, Russia’s central bank raised interest rates to 20%, providing a major incentive for Russians to save money. This measure reduces the sale of roubles which in turn eases the downward pressure. Russian businesses were also required to convert 80% of overseas revenue into roubles. Due to the significant number of Russian companies with business overseas, this requirement creates significant demand for the rouble, thus driving up the currency’s value. The central bank also announced that the currency would now be pegged to gold, at the rate of 5000 roubles for every gram of gold. The move to peg the rouble to gold was undertaken to stabilize and strengthen the currency. This would also increase the inflow of gold into the central bank and increase the country’s gold reserves.

However, the move that requires certain buyers of natural gas to pay in roubles has been the most significant ploy by Vladimir Putin to raise the national currency. Since most natural gas contracts are usually in Euros or Dollars, most buyers do not have large reserves of roubles in hand. This move ensures that countries buy roubles (in vast sums) to make the payment which naturally elevates the price of the rouble.

The combination of these factors managed to raise the rouble to levels it was at before the invasion, although experts warn that the rouble might be on borrowed time. The measures implemented by the central bank of Russia cannot go on forever, and the last week has shown the fall of the rouble (from 71 per dollar on 8th April to 82.09 on the 11th) due to the relaxation of the financial measures. The amount of prevailing uncertainty ensures that only time can determine the fate of Russia’s currency and the efficacy of the sanctions imposed.

Jatin Kulkarni (FYBSc 2021-2024)

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