It was meant to be an economic bazooka that would strike at the heart of Russia’s economy. On February 26th, two days after Ukraine was invaded, America and its Western allies froze much of Russia’s $640bn war chest of foreign-exchange reserves. Along with other measures, these sanctions were intended to inflict economic pain on the Kremlin. It worked at first: by early March Russia’s currency, the rouble, had fallen by 40% against the dollar. By March 31st a dollar could be exchanged for 82 roubles, just 4% lower than the average rate a week before the invasion began. What is the cause of the rouble’s resilience?
Russian officials have employed various tactics to defend the value of the currency. First, the central bank raised interest rates on February 28th from 9.5% to 20%. Second, they imposed a 30% fee on purchases of foreign exchange (since lowered to 12%). Third, exporters—such as those selling oil and gas—were mandated to convert 80% of their foreign-exchange earnings to roubles.
The Kremlin did not stop there. From March 31st it requested that foreign buyers of oil and gas pay in roubles. That would help prop up the currency further. But that is causing a stir in Europe. Three-quarters of Russia’s gas exports are piped directly to EU countries, whose contracts stipulate payment in euros. Germany, which gets half of its gas from Russia, is preparing for the possibility of looming gas shortages if a protracted dispute arises. On March 31st Vladimir Putin, Russia’s president, threatened to cut off gas supplies to “unfriendly countries” that did not pay in roubles from April 1st. But Russia needs the money as much as Europe needs the gas: in 2021 revenues from oil and gas financed one-third of the government’s revenue.
Although the rouble appears to be defying gravity, two other indicators suggest that the market price may not be all that it seems. First, the one-year forward exchange-rate for roubles against the dollar— a measure of the market’s expected exchange rate, given the interest-rate differential between Russia and America—suggests that the rouble may fall by about one-quarter from today’s value, to 110 or so to the dollar. Second, with many brokers either wary or prevented from dealing in roubles, the market price will be based on far fewer transactions than usual, in which the participants may have little choice about the price they get. By contrast, the going rate on the black market this week was reportedly between 135 and 250 roubles to the dollar.
Whatever the latest price, the story of the rouble is one of long-run decay. Russia’s debt crisis caused its trade-weighted value to fall by 70% in 1998. But since Mr Putin came to power on December 31st 1999 it has crumbled by a further 70%. Its long-term outlook is bleak, too. If Europe were to quickly wean itself off Russian gas it would take years to install pipeline capacity for alternative buyers in the east. The rouble may have further to fall.
