The Tribune

ACTIVTRADES WEEKLY

By CHRIS ILLING

Business Developer

www.activtrades.bs

EVEN many Russians cannot believe their eyes at the exchange offices in Moscow: The ruble is getting stronger and stronger. The Russian war of aggression against Ukraine, western sanctions, the mass departure of companies - all of this is weakening the country’s economy. On Thursday, for example, McDonalds announced the sale of its 850 stores to a Siberian businessman. This should also affect the ruble exchange rate. But far from it: If you got 145 rubles or more for one euro at the beginning of March shortly after the start of the war, you currently receive only 65.

The strong ruble is not a sign of strength. It is true that the Russian currency plummeted at the beginning of the war. The collapse of the Russian economy and an imminent debt default seemed unavoidable. But the ruble is stronger than it has been for a long time. Its exchange rates against the euro and the dollar have not only reached pre-war levels but are as high as they were amid the 2017 peak.

For people in the largest country in the world in terms of area, there are still no advantages. After the ruble crash in March, the prices for imported goods such as cheese or alcohol from the west were adjusted to the high exchange rate. Local shops just adjusted the price tags. A bottle of champagne for 2,900 rubles was now available for 4,900 rubles. However, the prices were not adjusted back to the strong ruble. The result? The champagne, which cost the equivalent of 34 euros before the war, is now worth more than 75 euros.

But luxury products are not the only items that have become more expensive. Many Russians are complaining about skyrocketing food prices. Since the beginning of the year, some goods have become 50 to 70 percent more expensive - cabbage by about 60 percent, carrots by 61 percent and sugar by 50 percent, according to the national statistics agency, Rosstat. Even a Russian newspaper suggested people follow the “American example”, and that the government provide 10,000 rubles per year to the needy person, so they could buy food from local production.

A strong ruble is of no use to many consumers because everything is more expensive. But it helps the Russian leadership to keep inflation within limits so that goods do not become even more expensive. If the ruble were not so strong, inflation would be around 30 to 40 percent instead of the current 20 percent.

The ruble is “artificially” strengthened by several measures, including restrictions on foreign exchange transactions by the Russian central bank. The massive increase in interest rates helped to convince citizens to invest their savings in rubles and not foreign currencies. The key interest rate is currently 14 percent. At the end of February, the central bank raised interest rates drastically by 10.5 points to 20 percent. Since then, many banks have been offering fat annual interest rates of around 10 percent for ruble investments, while there is almost no return on euro or dollar investments.

However, the main reason for ruble’s strength is a record surplus in the trade balance. By exporting oil and gas, for example, Russia earns billions in foreign exchange that cannot be spent at all. Because importing many Western goods has collapsed, the country is sitting on its euro and dollar earnings. This is one of the reasons why Russian president, Vladimir Putin, ordered Europeans to pay his country’s energy suppliers in rubles from April 1.

Experts have calculated that Russia could have a surplus of $250bn by the end of the year, also because of high energy prices. However, rubles are needed for the budget. As a result of monetary policy, the Russian currency has now become completely detached from the economy. If the economy is in freefall and the ruble is strengthening, then that’s not the real picture. The central bank estimates that Russia’s gross domestic product (GDP) will fall by 8 to 10 percent this year. It had previously assumed economic growth of 2 to 3 percent.

There are many factors in play. The freezing of Russian foreign exchange reserves in the west should also lead to a massive weakening of the currency. The Russian central bank is now allowing higher foreign exchange exports again – five times as much as before the war, but the reins of the monetary authorities remain tight.

However, if further sanctions are imposed on other Russian banks, this could massively hinder exports and damage the currency. If Russia exports, the ruble will remain strong. Only a complete embargo will bring the ruble to its knees. But new buyers are lining up. Oil tankers have been picking up record amounts of crude oil at Russian ports since mid- April. Cheap oil is a hot commodity right now even if it benefits the Kremlin.