Russian ruble makes large gains in spite of sanctions: are they working?

After nearly two months of what the EU and the US have referred to as state-crushing sanctions, the Russian ruble is now stronger (on paper) than before the country launched its invasion into Ukraine. With western powers still considering more sanctions, the ruble is poised to further strengthen its position against the both euro and the US dollar.

According to Bloomberg, the ruble is 2022′s best-performing currency, inching out an eleven percent increase in its exchange rate with the dollar over the last four months. Granted, the increase in real dollars is between .013 to .015, meaning that one ruble is still worth less than a penny, but the ruble is only one of three currencies to gain at all against the dollar this year.

Has China provided additional economic support to Russia?

Some beleive that China may be helping to prop up the Russian economy, while others see China’s continued trade as enough to offset the damge of EU and US sanctions. Thus far, continued trade at levels similar to those before the invasion have not been interepreted as “backfilling” by western powers.

In mid-April, US Treasury Secretary Janet Yellen sent a warning to leaders in Beijing.

Sec. Yellen stated that if China began to backfill Russia’s economy to mitigate the force of western sanctions, “it will be increasingly difficult to separate economic issues from broader considerations of national interest, including national security.”

“China cannot expect the global community to respect its appeals to the principles of sovereignty and territorial integrity in the future if does not respect these principles now when it counts,” said Sec. Yellen her speech.

While support from China explains part of the ruble’s sudden rise, the efforts taken by the Kremlin and Russia’s Central Bank (RCB) should not be underestimated. The country’s central bank has taken dramatic steps to increase demand for their currency, which comes some risks for the country’s economic future.

What has Russia done to avoid a collapse of its currency?

While the graphs show the ruble is gaining momentum, the news from the RCP tells a different story. Sanctions, which the bank refers to as “external trade and financial restrictions,” have led to a dramatic decrease in imports that has outpaced the decline in exports. Put more simply, Russian goods are leaving the country in higher quantities than foreign goods are coming in. Leaders at the bank reported that while “new suppliers and sales markets” are emerging, “businesses are experiencing considerable difficulties in production and logistics.”

After sharp increases in demand as the invasion began, fueled by fears of shortages, the RCP recorded that consumer demand stabilized from levels seen in late February and early March. However, shortages are being felt, with the country’s central bank noting that two-thirds of companies in Russia have seen import disruptions.

The RCB releases periodic economy-wide projections like the US Federal Reserve and it is currently accounting for an eight percent decrease in GPD and for inflation to grow between eighteen and twenty-three percent this year. By 2024, the bank projects the inflation rate to fall to around four percent; while GDP growth is expected to decrease in 2022 and 2023 and expand in 2024.

Natural gas takes a small hit

In part, the strength of the Russian economy, comes from the fact that its main market, natural gas, has not been that seriously effected by sanctions. The EU has proposed a similar ban on Russian energy exports to that of the US but so far has failed to get all members on board.

Russia has weaponized the dependence on its exports to increase demand for its currency. Gazprom, the state owned gas company, has announced a suspension of exports to Poland and Bulgaria over the countries’ refusal to pay in rubles. Threats against other European countries highly dependent on Russian energy resources, like Germany, have been made, but no actions have been taken so far. By forcing these countries to make payments in rubles, they have to buy them, which means that the demand and value of the currency could continue to rise.

How have sanctions impacted Russia’s oil market?

In March, the United States banned imports of Russian oil, which led to a sharp increase in global prices. Russia’s Central Bank has reported that sanctions have led to “a contraction of [oil] exports due.” Citing the Central Dispatching Department of the Fuel and Energy Complex, the bank reported a 10.9 percent drop in oil refining in March.

Will the European Union place an embargo on Russian oil imports?

The EU’s proposal to ban Russian energy resource exports would require the transition away take place in the next six moths.

The move would be a severe escalation in Europe’s economic attacks on the Russian economy. Countries highly dependent on Russian oil exports like Hungary (75 percent) and Slovakia (100 percent) are voicing their opposition to the proposal.

Hungary’s Viktor Orbán, the far-right leader who just won reelection for the fourth time, said in an interview that a Russian oil embargo would “ruin” the country’s economy, drawing a “red line” over their support for such a move.

For the motion to be adopted by the EU, all twenty-seven member states have to agree. Interestingly, in 2020, the Hungarian Ministry of Foreign Affairs and Trade voiced opposition to proposed changes to the EU voting structure to remove the unanimous vote rule.

“The proposal according to which European Union foreign policy decisions would not require a unanimous vote in future is dangerous from Hungary’s perspective, and is totally at odds with the EU treaties,” said Péter Szijjártó, the Minister of Foreign Affairs and Trade.

The statement shows a pattern of Hungary separating itself from the “liberal mainstream and Brussels,” after what they saw as attempts “to stirp smaller countries” of their rights to “enforce their own interests during the course of foreign policy decision-making.” Now, nearly two years since this press release was published, Hungary shows that it will stand in opposition to other EU countries to advance its interests.

Much of their opposition in 2020 is related to migration. At the time, Min. Szijjártó said that the country “was not prepared to welcome migration, and will not be prepared to do so in future.” Since the Russian invasion began, Hungary has accepted over 600,000 Ukrainian refugees.