Russia's ruble hit 52.3 to the dollar on Wednesday, its strongest level in over a year.
It was a world away from its plunge to 139 to the dollar in early March, when the U.S. and European Union began rolling out unprecedented sanctions on Moscow.
The ruble's surge in the following months gave the Kremlin a reason to believe that Western sanctions aren't working.
Putin said last week that the idea was to crush the Russian economy. They did not achieve their goals. That didn't occur.
Russia increased its key interest rate to 20% from 9.5% after the ruble fell and the invasion of Ukraine began. The interest rate on the currency has been lowered three times since then, the last time being in May.
Russia's central bank is trying to weaken the ruble in order to make it less competitive in the export market.
Can the currency's rise last?
It's because of strikingly high energy prices, capital controls and sanctions themselves.
Russia is the world's largest gas and oil supplier. Is it its main customer? The European Union has been buying billions of dollars worth of Russian energy each week while at the same time trying to impose sanctions.
The EU has sent more money to Russia in oil, gas and coal purchases than it has sent to Ukraine, which has helped fill the Kremlin's warchest. Even though Western countries have stopped buying Russian oil, Moscow is still making a record profit.
Russian President Vladimir Putin and Defence Minister Sergei Shoigu attend a wreath-laying ceremony, which marks the anniversary of the beginning of the Great Patriotic War against Nazi Germany in 1941, at the Tomb of the Unknown Soldier by the Kremlin wall in Moscow, Russia June 22, 2022.According to the Centre for Research on Energy and Clean Air, in the first 100 days of the Russia-Ukraine war, the Russian Federation earned $98 billion from fossil fuel exports. Half of the earnings were from the EU.
The EU relied on Russia for 42% of its gas imports and 34% of its oil imports in 2020.
The EU passed a landmark sanctions package in May that partially banned imports of Russian oil by the end of the year, but it had significant exceptions for oil delivered by rail, since Hungary and other countries can't access alternative oil sources that are shipped by sea.
Max Hess, a fellow at the Foreign Policy Research Institute, said that Russia is earning record current account surpluses in foreign exchange. The majority of revenue is in dollars and euros.
Russia is still selling a ton of oil and gas to the West even though they are selling less to the West. This is going to bring in a big current account surplus.
Russia had a current account surplus of $110 billion in the first five months of this year, more than triple the amount of the same period last year.
Capital controls, the government limiting of foreign currency leaving its country, and the fact that Russia can't import as much because of sanctions are some of the factors that have helped here.
It’s really a Potemkin rate, because sending money from Russia abroad given the sanctions — both on Russian individuals and Russian banks — is incredibly difficult.
As soon as sanctions were imposed, authorities implemented strict capital controls. Money is flowing in from exports while there aren't many capital outflows. A stronger ruble is the result of all this.
Russia has relaxed some capital controls and lowered its interest rate in an effort to weaken the ruble.
Russia has been left to trade with itself because it is no longer able to use the international banking system. Russia can't use its foreign reserves to serve its import needs because of sanctions
The ruble's exchange rate is Potemkin because it's difficult to send money from Russia to other countries due to the sanctions.
Potemkin refers to fake villages that were built to provide an illusion of prosperity to Catherine the Great.
The ruble on paper is a bit stronger, but what is the point of building up foreign exchange reserves if you don't need them? Russia can't do that
People line up near Euro and U.S. dollars rates to ruble sign board at the entrance to the exchange office on May 25, 2022 in Moscow, Russia. Russia moved closer to a default on Wednesday after the U.S. Treasury let a key sanctions exemption expire.The underlying issues in the Russian economy need to be looked at. If the ruble says it has a high value, that will have a devastating impact on the economy.
Is the strength of the ruble a sign that Russia's economy is sound? Analysts don't think it's so fast.
"Ruble strength is linked to a surplus in the overall balance of payments, which is much more driven by sanctions, commodity prices and policy measures than by long term underlying macroeconomic trends and fundamentals," said Themos Fiotakis, head of currency research atBarclays.
In May, Russia's Ministry of Economy said that it expects unemployment to hit nearly 7% this year, and that a return to 2021 levels is not likely until 25 years later.
Thousands of international companies have left Russia since the beginning of the war in Ukrainian. According to Russia's federal statistics agency, poverty nearly doubled in the first five weeks of the war.
The Russian ruble isn't an indicator of the economy's health anymore. The ruble has appreciated thanks to the interference of the Kremlin, but its inattention to Russian well-being persists. The number of Russians living in poverty increased from 12 million to 21 million in the first quarter of 2022.
The ruble's strength depends on how the geopolitics evolve and policy changes.
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