How did Russia stabilize its currency against the odds?
Russia’s attack on Ukraine and the following sanctions by the West drop the Russian currency to an all-time low.
First, Russia’s strategy to back up its currency seemed to be failing. The country had prepared itself for sanctions by hoarding billions of dollars in foreign currency, which it would use for buying rubles to keep its value stable. But the Russian government didn’t expect that the West would block Russia’s access to its foreign exchange reserves.
“As a result of these unprecedented sanctions, the ruble almost is immediately reduced to rubble,” Joe Biden said, commenting on the unprecedented plunge of the ruble at the beginning of March.
But Biden was a bit premature with his comment.
In just one and a half weeks after Russia’s attack, the ruble’s value towards the dollar halved, making 1 dollar cost 132.00 rubles. But then, in the following three weeks, the value of the Russian currency returned to its pre-war level. Furthermore, in June, the ruble hit its highest value towards the dollar since 2015: 1 dollar was worth 50.00 rubles.
How could Russia stabilize and even strengthen the ruble while roughly half of its exchange reserves are frozen?
First, Russia did everything to stop foreign capital from flowing out of the country. These measures, defined as capital controls, included basically freezing the bank accounts with dollars or euros and restricting the ability of Russians to convert rubles into dollars. Also, trading was restricted when the Russian stock market was closed for one month, and foreign investors were prevented from cashing out of Russia.
In addition, the central bank of Russia more than doubled the interest rate from 9.5% to 20%. According to the officials, the emergency measure was needed “to support financial and price stability and protect citizens’ savings from depreciation.” With a massive lift in the interest rate, Russia wanted to calm its citizens and convince them to trust in the ruble’s value. The record high interest rate made it nearly impossible for Russians to borrow money.
Secondly, the authorities told export-focused companies to sell 80% of their foreign currency revenues on the market. It means that the state companies were pushed to carry out the role of the central bank in supporting the ruble while the central bank itself couldn’t carry on the interventions.
With these forced measures, Russia managed to stabilize its currency. On top of that, the high prices for oil and gas kept foreign capital, including euros and dollars, flowing into Russia, strengthening the ruble even more.
For Russians, the price of the ruble is psychologically crucial. People are aware of the currency’s value. For ordinary citizens, it’s common to measure the current state of the economy by the rate of the ruble (even if it’s not that simple). Many still recall the financial crisis of the 90’s when the ruble was devalued as their worst nightmare. Therefore, stabilizing the currency after the Western sanctions must have been the primary task for the Kremlin, and achieving it has strengthened the people’s faith in the economy.
Russia has avoided the crash for now, but the economy is in deep trouble. It’s difficult to maintain the high value of the ruble in the long run, and it’s just a part of the solution. It’s evident that Russia can’t fix its economy just with a strong currency.
