Market: What hides the strong appreciation of the ruble against the euro and the dollar

Market: What hides the strong appreciation of the ruble against the euro and the dollar

(BFM Bourse) – The Russian currency has posted significant gains since the beginning of the year against major Western currencies. But far from proving that the economy is impervious to Western sanctions, this increase is largely artificial.

The ruble is very expensive and the Kremlin has had good luck using it to ensure that Western sanctions do not succeed in hurting the Russian economy. Since the beginning of the year, the Russian currency has gained more than 23% against the dollar and almost 40% against the euro. The ruble even hit a seven-year high against the US currency in June.

It is true that the strength of a currency is sometimes perceived as a reflection of the strength of an economy. The best example remains the Swiss franc, whose value has often been held up as a symbol of Swiss prosperity. But this image of Epinal is actually misleading. In the case of Russia, the jump in the ruble in no way reflects the good health of the economy.

“For many analysts, the Russian government has done much more than defend its currency: it is manipulating the ruble market and creating a demand that would not otherwise exist. In fact, some observers criticize the Russian central bank for using a whole range of tools to make the ruble looks like a valuable currency, when in reality very few people outside of Russia want to buy a single ruble unless absolutely necessary,” explains Charles-Henri Monchau, chief investment officer at Banque Syz.

Driven by gas, oil, India and China prices

In fact, the appreciation of the ruble is due both to simple market mechanisms and, for many, to distortions. In concrete terms, Russia’s current account surplus has increased very sharply, mainly due to the increase in the value of oil and gas exports. After peaking at $37.6 billion in April, this surplus certainly dipped to $28 billion in July. But this surplus remains three times higher than that of the same month of 2021.

Although Russia recently decided to cut off the Nord Stream 1 pipeline and thereby stop supplying Europe, it had previously had little difficulty finding customers for its oil and gas.

“The sanctions were originally designed to restrict Russia’s ability to acquire foreign currency, particularly dollars and euros. But several European countries continue to buy Russian gas because they depend on it and because there are not enough alternative suppliers to meet demand, ”she recalls. Charles-Henri Monchau.

“Let’s add that the countries that did not vote for sanctions, including China and India, have strongly increased their imports of natural gas (and oil). The effect of ‘new customers’ + price increase has more than offset the reduction in exports. to Europe”, he develops. This further supports the local currency as Russia forces its buyers to pay for imports in rubles.

Faced with the increase in the value of its exports, Russia’s imports are collapsing, weighed down by Western sanctions.

capital controls

Beyond foreign trade, the ruble is also artificially boosted by capital controls put in place by Moscow since the start of the war, through a series of measures.

“Companies are still required to convert at least 50% of their foreign exchange earnings into rubles, although this threshold has been lowered slightly, since it was at 80% between March and July,” explains an economist specializing in Russia who asked for the report. anonymity for professional reasons.

Obviously, this is not the only device implemented by Moscow. “The Kremlin also issued a decree prohibiting Russian brokers from selling foreign-owned securities. Many foreign investors own shares in Russian companies and government bonds and wanted to sell their holdings after the announcement of the Russian invasion and sanctions,” Charles stresses. – Henri Monchau.

Individuals were not saved. “Russian citizens themselves have been targeted by the government, as the Kremlin banned them from transferring money abroad. The original ban stated that all loans and currency transfers had to be suspended,” explains Charles-Henri Monchau again. “These restrictions have been relaxed a bit recently, but transfers are limited to $10,000 per month for individuals through the end of this year,” he said.

The expert also highlights “another forceful measure” that “has gone relatively unnoticed in the Western media”: the fact that the Bank of Russia has resumed its purchases of gold at a fixed price of 5,000 rubles per 1 gram between March 28 and June 30.

“This operation allows the central bank not only to peg the ruble to gold, but also to set a floor price for the ruble in dollars (since gold is quoted in US dollars). The floor price is estimated at about 80 rubles per dollar (5,000 rubles divided by 62 dollars per gram of gold) This operation raises the possibility of a return to the gold standard for the first time in more than a century, “he details.

The ruble is no longer a free trade currency

Other measures go in the direction of an increase in the ruble: since the invasion of Ukraine, the Russian central bank can no longer, due to Western sanctions, buy the main Western currencies (dollar, euro, yen, pound) to weaken the ruble . , as it did from 2017 to February 2022, whenever oil prices rose above $40 a barrel.

All this very clearly weakens the status of the ruble, which can hardly be described as an international currency. “As things stand, traders no longer regard the ruble as a free-trade currency. Capital controls imposed as a result of Western sanctions mean that the exchange rate is managed effectively,” notes Charles-Henri Monchau. . “Many exchange houses have even stopped trading the ruble on the grounds that its value shown on screens is not the price at which it can be traded in the real world,” he continues.

Also, this appreciation does not help the Russian economy. “The strong ruble penalizes the Russian economy: due to its strength and the obligation imposed on other countries to pay for their imports in Russian currency, budget revenues linked to the sale of raw materials are decreasing, which is a problem,” he stresses. the anonymous. economist quoted above.

According to the International Monetary Fund (IMF), Russia’s gross domestic product is expected to contract by 6% this year.

[Note: les taux de change ont été arrêtés vendredi en milieu d’après-midi]

Julien Marion – ©2022 BFM Bourse

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