How the Russian Central Bank Engineered the Ruble’s Rebound

The ruble is in a central bank-induced coma.

While Russia’s currency may still experience wild swings in a day, it has trimmed its heavy losses and started to stabilize. It is now trading at around 99 rubles to the dollar, about 17% weaker than before. Russian troops invaded Ukraine on February 24, but stronger than its all-time low of 151 on March 7, according to FactSet.

Rising currency prices often reflect a general strengthening of a country’s economic prospects. Not so in Russia. Rather, the central bank’s moves to limit the sale of rubles and force the purchase of rubles have effectively manufactured demand for the currency.

Russia limited the amount of dollars residents can withdraw from foreign currency bank accounts and banned banks from selling foreign currency to customers for the next six months. Russian brokerage houses also cannot allow foreign clients to sell securities. These measures have made it difficult to sell the ruble, thus limiting its losses.

Banks, worried about breaking Western sanctions, have to settle every transaction in rubles with their legal and compliance departments.


Photo:

Sven Hoppe/Zuma Press

Western sanctions against Russia left exceptions for energy exporters that Europe is particularly dependent on, keeping dollars and euros flowing into the country. Russia ordered those exporters to sell 80% of their foreign currency earnings and buy rubles, which helped the currency appreciate.

“It’s fair to say that the ruble is not a market price,” said Robin Brooks, chief economist at the Institute of International Finance. “If there was a free flow in both directions, we would see a much weaker ruble.”

russian president

Vladimir Putin

He recently said he wants European countries will start buying Russian gas with rubles instead of dollars and euros. That would reverse the current flow of money, making sanctioning nations support Russia’s currency and ensuring all funds from energy sales back its value, said Christian Kopf, head of fixed income at asset manager Union Investment. Such a move is unlikely, but it signals Russia’s desire to boost demand for the ruble.

The consequences of the harsh economic sanctions against Russia are already being felt around the world. The WSJ’s Greg Ip joins other experts to explain the significance of what has happened so far and how the conflict could transform the global economy. Photo illustration: Alexander Hotz

Currencies often move with the ups and downs of a country’s economy. Investors want to put money into economies they think will prosper, buying stocks and bonds denominated in that country’s auction.

It is more difficult to take such ideas from the ruble. Hundreds of companies have announced a withdrawal from Russia, meaning imports are likely to contract. At the same time, Russia continues to sell its oil, which means that exports and the money made from them will more than offset the money needed for imports. Oil prices above $100 a barrel are also giving earnings a boost, even as Moscow inventories operate at a discount. The imbalance could strengthen the ruble, although it does not strengthen the Russian economy.

“There are so many things that are not allowed to be bought or sold,” said George Pearkes, macro strategist at Bespoke Investment Group. “The ruble could get very strong from here, and it would mean nothing.”

After the war broke out, the ruble market was divided to have one value within Russia and another on international markets. In onshore trading, Russia’s currency was valued at 94 rubles per dollar on Monday, while it traded at 98 on international markets. That gap has narrowed since early March.

Russian banks offered slightly fewer rubles for customers’ dollars than the Moscow Stock Exchange on Monday. Sberbank PJSC offered about 89 rubles for one dollar, while the Russian website of Austria

Raiffeisen Bank

quoted 86.

Many Western banks no longer offer electronic quotes for buying and selling rubles. Instead, customers should call the bank and ask if it is willing to process a transaction and at what rate. Banks, concerned about breaching Western sanctions, have to settle every transaction in rubles with their legal and compliance departments, traders say.

European countries have announced plans to move away from Russian energy in the coming years, which will also weaken the ruble in the long run.

“We are seeing a Russian ruble weakening significantly over the long term,” said Jane Foley, head of foreign exchange strategy at Rabobank.

Email Caitlin Ostroff at caitlin.ostroff@wsj.com

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