Russian ruble (USD/RUB) faces moment of reckoning as war intensifies

on Feb 28, 2023
  • The USD/RUB exchange rate has rebounded in the past few months.
  • Russia is expected to slow down in 2023 as natural gas retreats.
  • The US dollar index has staged a strong comeback.

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The Russian ruble has had a rough ride since the invasion of Ukraine started in 2022. After initially soaring to a record high of 154, the USD/RUB exchange rate plunged to a low of 50.77. This 67% surge made the ruble one of the best-performing currencies in the world. It also became a pride of Moscow, which used it to demonstrate that western sanctions were backfiring.

Why Russian ruble surged

The USD/RUB plunged after Russia’s invasion of Ukraine for several reasons. First, the central bank swung into action after western governments announced their sanctions. It pushed interest rates to 20% in a bid to encourage ruble investments. 

Second, the central bank initiated strong capital controls that limited the amount of money leaving the country. As a result, it became increasingly impossible or difficult for individuals and companies in Russia to move their funds to safer places like Switzerland. It softened these controls in May in a bid to boost the economy. 

Third, Russia ordered unfriendly countries like those in the European Union to make gas payments in the Russian ruble. The idea was to ensure that countries first converted their currencies to ruble before making the payments. This, in turn, led to more demand for the Russian ruble.

Finally, and most importantly, Russia benefited from the relatively elevated oil and gas prices. Natural gas prices jumped to a record high as the country reduced the amount of flows sent to Europe. Similarly, the country benefited from the soaring oil prices. Brent soared to a high of $138.

Ruble is now under pressure 

Several analysts welcomed the stronger Russian ruble and warned that it would be temporary. It seems like they were right considering that the USD/RUB pair has jumped by more than 50% from the lowest point in 2022.

This reversal is based on several factors. First, Russia’s economy remains under pressure, with the International Monetary Fund (IMF) expecting it to shrink by more than 5% this year. 

Second, it seems like the policies that pushed the Russian ruble upwards are now working against it. For example, natural gas prices have plunged to the lowest levels in more than three years. And Europe seems to be doing much better now that it has reached supply deals with the United States, Qatar, and other countries. As a result, Russia has now been left to find alternative consumers and is likely giving them attractive discounts. 

It also appears like Russia’s oil is trading at a big discount, thanks to western sanctions. Russian urals was trading at $54, giving it a discount of $32 to Brent, the global benchmark. As such, Russia is selling fewer barrels of oil per day at a lower price. 

Russia is also hurting in other areas as well. For one, its key exports have seen their prices plunge. For example, coal prices have pulled back from their highest levels in 2022. Similarly, gold has erased most of the gains it made earlier this year. 

Therefore, if the situation continues, Russia will now continue struggling in the near term. Worse, the country’s military is struggling in the battlefield. 

Strong US dollar index

The USD/RUB exchange rate has risen because of the actions of the Federal Reserve (Fed). The Fed decided to hike interest rates by 400 basis points in 2022, making it one of the most hawkish year’s in history. It also started quantitative tightening (QT). It has reduced its balance sheet by billions of dollars in the past few months.

The Federal Reserve has maintained a hawkish tone. In February, it hiked interest rates by 0.25%, the smallest in months. It had previously hiked by 0.50% in December and 0.75% in the previous four meetings.

Recent data points to more rate hikes in 2023. In February, as I wrote here, the unemployment rate crashed to 3.4%, the lowest level in 53 years. Inflation, on the other hand, remained above 6% in January while retail sales jumped to the highest level since 2020. As a result, analysts expect that the Fed will maintain its hawkish tone in the coming months. In a recent note, Loretta Mester, a Fed official said:

“Nonetheless, inflation’s too high. We have to do what we can do with the interest rate tool to get inflation down. It’s our responsibility to get back to price stability, and we’ll happen to let the economy tell us.”

As a result, the US dollar index has surged from the year-to-date low of $100 to about $105. The dollar has jumped above most emerging market currencies.

USD/RUB outlook


USD/RUB chart by TradingView

The USD/RUB exchange rate is expected to keep rising as the US dollar index maintains a bullish trend and the Russian economy crumbles. On the daily chart, the pair has formed an ascending channel shown in black. It has moved slightly below the upper side of this channel. It has moved above the 25-day and 50-day moving averages.

Therefore, the USD to RUB rate will keep soaring as buyers target the next key resistance level at 85.55, which is about 15% above the current level.