This is how Putin plays the cycle

sEven many Russians do not believe their eyes in the Moscow exchange offices: the ruble is getting stronger and stronger. The aggressive Russian war against Ukraine, Western sanctions, the mass departure of companies – all this weakens the economy of the giant empire. This should also affect the ruble exchange rate. But far from it: if you got 145 rubles or more for 1 euro at the beginning of March shortly after the start of the war, then there are currently only 65 rubles. Russia has been known to manipulate the value of its currency for a long time. However, the current recovery raises many questions.

“A strong ruble is not an indicator of strength,” says chief economist Moritz Kramer at Landesbank Baden-Württemberg LBBW. True, the Russian currency depreciated at the beginning of the war. “The collapse of the Russian economy and the imminent default seemed predestined.” But the ruble is stronger than it has been for a long time. Its exchange rate against the euro and the dollar not only reached its pre-war level, but also reached a level as high as it was in 2017.

Everything becomes more expensive

For people in the world’s largest country by area, there are still advantages. After the ruble collapsed in March, the prices of imported goods such as cheese or alcohol from the West were adjusted to the high exchange rate. The staff hastily pasted the new price tags. A bottle of champagne for 2900 rubles became one for 4900 rubles. However, prices have not been adjusted to return to the strong ruble. The result: Champagne, which cost the equivalent of 34 euros before the war, is now over 75 euros.

But not only luxury products are becoming more expensive. Many Russians complain about the skyrocketing food prices. Since the start of the year, some goods have become 50 to 70 percent more expensive — cabbage at 60 percent, carrots at 61 percent and sugar at 50 percent, according to the national statistics agency Rosstat. For example, the tabloid newspaper Moskovsky Komsomolets called for an influx of money from the state budget – 10,000 rubles a year for each needy person, so that people could buy food from local production. There is such help “even in America”.

A strong ruble will not help

So, a strong ruble does not benefit many consumers, because everything is more expensive. Above all, it helps the Russian leadership to keep inflation within limits so that goods do not become more expensive. “If the ruble were not so strong, inflation would not be 20 percent, but 30-40 percent,” Russian economist Sergei Swirov told the Medusa online newspaper. At the same time, he makes clear that the current path is “not a market economy.”

The ruble was “artificially” strengthened by a number of measures, including restrictions on foreign exchange transactions by the Central Bank. Last but not least, the huge increase in interest rates helped, which is why many citizens invested their savings in rubles, and not in foreign currencies. The prime interest rate is currently 14 percent. At the end of February, the central bank radically raised the interest rate by 10.5 points to 20 percent. Since then, many banks have offered exorbitant annual interest rates of about ten percent on ruble investments, while there is almost nothing for euro or dollar investments.

Record a surplus in the trade balance

However, the main reason for the strength is a record surplus in the trade balance. By exporting oil and gas, for example, Russia earns billions in foreign currency that cannot be spent at all. Due to the collapse of the import of many Western goods, the country is sitting on its earnings from euros and dollars. This is one of the reasons why Russian President Vladimir Putin ordered the transfer of gas payments to Europeans into rubles on April 1. The Kremlin chief said Russia could not buy anything with foreign exchange.




Experts estimate that Russia could have a surplus of $250 billion by the end of the year, also due to higher energy prices. However, rubles are needed for the budget, says investment expert Suvirov. As a result of monetary policy, the Russian currency is now completely separate from the economy. “If the economy is in free fall and the ruble is strengthening, it is not true,” he says. The Central Bank estimates that Russia’s gross domestic product will fall by 8 to 10 percent this year. It had previously assumed 2 to 3 percent economic growth.

Sanctions on banks could seriously damage the ruble

Swiro says it is difficult to determine the “fair” path at the moment. There are many influencing factors. In his view, the freezing of Russian foreign exchange reserves in the West should lead to a massive weakening of the currency. The central bank is now allowing higher foreign exchange exports again – five times instead of $10,000. But the reins of monetary authorities are still tight.

However, if sanctions are imposed on other Russian banks, it could destroy exports and seriously damage the currency, says Swirov. Chief Economist Kramer of LBBW in Stuttgart argues that the ruble will remain strong “as long as Russia exports exports, only a complete ban can “bring the ruble to its knees,” he said. But buyers are not holding back.” Oil tankers are picking up record amounts of Crude oil in Russian ports since mid-April. Most of them are under the Greek flag!”

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