The rise of the rouble amid the Ukraine invasion

• The Russian rouble has staged an impressive recovery after it lost about half of its value in the wake of Russia’s invasion of Ukraine.
• The currency has recovered almost all of the losses it incurred following the invasion and has thus, surprised many who had predicted a further fall in its value.

What kind of sanctions were imposed on Russia?

Sanctions were imposed on the Russian economy by Western governments right after Russia invaded Ukraine in late February.

• Sanctions included cutting off many Russian banks from the SWIFT payments signalling system and also freezing the Russian central bank’s foreign reserves held abroad.
• Many western companies including oil majors such as British Petroleum and Shell also pulled out of Russia amid pressure from Western governments.
• Sanctions basically made it harder for Russian businesses to sell their goods abroad and also made it harder for ordinary Russians to purchase goods from abroad.
• Rouble experienced a sharp hit right leading many to believe that the Russian economy had been brought to its knees.
• It took about 81 roubles to purchase a US dollar one day before Russian forces invaded Ukraine on February 24. A couple of weeks later, it took 151 roubles to purchase a US dollar, marking the rouble’s low since the beginning of the war. This week, it takes about 83 Russian roubles to buy a US dollar.
• The rouble has, thus, recovered pretty much all of the losses that it incurred in the aftermath of the war.

What’s driving the rouble’s sharp recovery?

The price or exchange value of any currency is determined by the supply and demand for the currency.

• Through sanctions, dollars flowing into Russia were made harder, either in the form of investments or by the purchase of Russian goods.
• Sanctions on the Russian central bank also made sure that the Bank of Russia could not flood the currency market with US dollars to prop up the value of the rouble.
• The demand for foreign goods and assets, however, remained stable and when combined with a drop in the inflow of dollars, it caused the value of the rouble to fall in the initial weeks of the war.
• The Russian central bank was able to counter this negative trend in the forex market that had caused the rouble’s value to plunge against the US dollar.
• It managed to do this primarily through capital controls that aim to increase demand for roubles and reduce the demand for dollars.
• Bank of Russia ordered Russian energy exporters, who still had access to US dollars, thanks to exceptions in Western sanctions to Russian energy exports, to use 80% of their forex holdings to purchase roubles.
• It ordered Russian brokers to not allow foreigners to sell their assets in Russia; to prevent the outflow of capital which would further depreciate the rouble as investors sell their roubles to purchase dollars.
• The Russian central bank’s decision to raise its benchmark interest rate to 20% could have also helped draw some foreign investment that propped up the exchange value of the rouble.

What lies ahead?

• Capital controls imposed by the Russian central bank, including the use of dollars earned by selling Russia’s huge energy reserves to prop up the rouble, may help in shoring up the rouble but this respite for the rouble may be temporary.
• It should be noted that capital controls affect the free flow of capital and could have serious implications for Russia’s future economic growth since investors are generally wary of investing in economies that do not allow the free exit of capital.
• It should also be remembered that the Russian economy is poorer due to the exit of foreign businesses and the boycott of the Russian economy by the West.

Exam Track

Prelims Takeaway

• Exchange rate
• SWIFT
• Monetary policies

Mains track

Q. Sanctions were imposed on the Russian economy by Western governments right after Russia invaded Ukraine. Discuss the impact of sanctions on the Russian economy and why economic sanctions are likely to be even less effective against Russia in 2022?