Russian ruble hits 7-year high, highlighting failure of West’s sanctions

on Jun 27, 2022
Updated: Aug 4, 2022
  • Ruble initially fell 40% following Ukrainian invasion and sanctions, but has rebounded strongly to 7-year high
  • Ruble so strong that Russian Central Bank is trying to weaken it, fearing it will negatively affect exports
  • The Ruble's strength is fake but still highlights failure of West's sanctions, argues Dan Ashmore

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It’s no secret that the dollar has been outperforming relative to other currencies, as I wrote about here, when I felt the brunt of it while holidaying in Ecuador last week (who use the USD). The dollar may be getting crushed compared to real goods and commodities as inflation spirals, but relative to other fiat currencies it has been very strong.

The dollar index (DXY), which measures the dollar against a basket of foreign currencies, is up 9% this year.

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Amid this backdrop of a stout dollar, therefore, it’s quite the staggering fact that the Russian ruble hit an seven-year high against USD last week. Yeah – that same Russian ruble that was meant to be weakened beyond recognition as a result of the economic sanctions levied against the country by the West.

Let’s rewind to March, when Joe Biden said the below:

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As a result of these unprecedented sanctions, the ruble almost is immediately reduced to rubble

President Joe Biden, March 26th 2022

Hmmm. A glance at the chart shows that while the ruble initially felt the brunt of Biden and co.’s sanctions, it has rebounded significantly since. With Russia invading Ukraine on 24 February, the ruble was down 46% within 12 days and 1 USD could net you 139 rubles. Since then, however, the ruble has appreciated massively, to where it is now, up 38% on the year and trading at 54 rubles per dollar.

Why has the ruble been so strong?

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I assessed whether the ruble was worth shorting here on April 29th, when it was trading at 73 rubles per dollar, back past pre-invasion levels. I concluded that the manipulation of the ruble by Putin was too strong, and hence it would be too risky to short.

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I believe (Putin’s manipulation) is too prohibitive here. The most impactful of all is Putin’s attempt to force “unfriendly countries”, including all states within the European Union, to pay for gas in rubles

The above is exactly what has happened. As gas prices have rocketed, Russia is raking in dizzying profits. It’s both ironic and sad that the bulk of this is from the EU, the region which is simultaneously hammering Russia with sanctions.

While Europe aims to reduce this reliance, the economic reality is that a country cannot simply switch off its oil imports overnight. Even the oil embargo from May has exemptions, such as imports delivered by pipeline, which was fought for by landlocked countries who had minimal alternative sources (think Hungary and Slovenia).

But this reduction on imports takes time, and even though the West is importing less oil from Russia, the record prices mean the profits are higher than previously, and the foreign reserves of Russia are showing healthy balances.

Capital controls and sanctions

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It’s not all because of oil.

Even more ironic is that the sanctions themselves are aiding here. Russians cannot import the same goods as previously due to sanctions, meaning less rubles are sent abroad and the foreign exchange rate is further bolstered.

But if you think about this for a second, it kind of backs up my point in the previous article – that this ruble strength is fake and an engineered FX rate. Sure, the ruble is strong, but who is trading it? Russian capital controls have been vigorous since the invasion commenced, and while they are now being loosened as the ruble has shrugged off a lot of the concern and began to strengthen, there are still significant barriers to trading the ruble.

If somebody can’t freely trade it, and if Russians can’t freely buy imports with it, then what’s the point in it even being strong? It’s not really true, is it?

Final thoughts

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We are now at the stage where the ruble is so “strong” that the Russian central bank is actively trying to weaken it, fearing that exports will be negatively affected. Having risen interest rates to 20% to fight off the impact of the sanctions, the Central Bank has since cut the rate three times, now at 11%.

The idea was clear: crush the Russian economy violently…they did not succeed. Obviously, that didn’t happen

President Putin last week during the St. Petersburg International Economic Forum

While this strength is manufactured, the above quote from Putin is nonetheless true. His controls and manipulation has served to bat off the West’s best intentions to tank the Russian currency. As long as Europe continues to shop in Russia for oil, their sanctions won’t carry serious weight.

The saddest statistic of them all? Europe has spent significantly more on Russian energy, helping to fund the war effort, than it has sent to Ukraine in aid. It’s not an overstatement to say the sanctions approach has been a disaster.

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