A Wily Russia Has Managed To Prop Up the Ruble. But Can the Illusion Last?

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When the war began and sanctions were announced, the ruble collapsed overnight by some forty percent. But with some very clever moves, and using the power of its petroleum, Russia has managed to pump the currency back to where it was just before the invasion. That is no small feat, and it’s worth understanding both how Russia did it and whether it can hold.

Russia continues to sell natural gas.

Europe is addicted to Russian energy. That is well known and has produced the greatest amount of hand-wringing in any talk of tougher sanctions. Combined with the high price of energy, and large purchases of Russian energy by nations such as India and China, this has meant a continued influx of foreign currency into Russia. Recently, Putin made an additional gambit by insisting that countries seeking to purchase Russian energy must do so using rubles. While that is nowhere in the contracts, which typically specify dollars and euros as payment, it has added to speculation that the ruble will remain in demand, lending support to its price.

If European nations hold firm and insist on making their payments in euros or dollars, however, that could take the air out of this campaign by Putin and weaken confidence in the ruble. It is in essence a high-stakes game of chicken to see if the Kremlin or European leaders blink first: Russia needs backing for its currency, and the EU countries need natural gas.

Meanwhile, the EU is busy seeking alternative sources for energy. Lithuania recently became the first country to declare itself independent of Russian energy, opting to import liquified natural gas from other sources. Germany has already reduced its dependence on Russian gas by some 15 percent, and as the biggest economy in Europe has stated that it intends ultimately to wean itself off of Russian energy completely. Still, that is a massive undertaking. Russia supplies the majority of the natural gas and about a third of the oil that Germany needs for its homes, businesses and transportation. And about half of Germany’s coal imports, critical to steel manufacturing, comes from Russia. It remains to be seen whether Germany can rid itself of the burden of Russian energy dependence and can cut off a main lifeline for Russia and the ruble.

Russian Interest Rates are Sky High

To help convince Russians to keep their money in the bank and to tamp down inflation, the Russian central bank doubled its interest rates to an eye-popping 20 percent and kept them there. While that’s some good news for Russian depositors, it is a gut punch to borrowers, including homeowners with variable interest rates and businesses with lines of credit and other debt. The high-interest rates are contributing to an economic contraction as the cost of money rises even while the ruble manages to stay afloat.

Russia is no doubt hoping that the high-interest rates will put the brakes on inflation, but with sanctions that is an iffy proposition. The lack of foreign goods and materials has made critical supplies quite scarce, thereby driving up their costs as buyers compete for a smaller pool of resources and manufactured items. Many wonder whether the interest rates can remain this high for very much longer without contracting the economy beyond what is politically and socially sustainable, especially if millions lose their jobs on top of seeing double-digit inflation.

Russia Is Manipulating Support for Its Currency

U.S. Secretary Antony Blinken came out clearly to state that the ruble’s recent resurgence was being driven by “a lot of manipulation” by Russia. “People are being prevented from unloading rubles,” Blinken said. “That’s artificially propping up the value. That’s not sustainable. So, I think you’re going to see that change.”

Russia has imposed artificial restrictions on trading in its currency in a number of ways. For example, it took drastic measures to keep dollars from fleeing the country, including bans on foreign investors from selling any Russian stocks or bonds and outlawing short selling. This shrank the total number of transactions considerably, meaning the price of the ruble is being determined by a lot fewer players.

If the market were free to determine the real price of the ruble, capital flight would likely ensue, driving down demand for the local currency while increasing local demand for dollars and euros. All of these artificial supports for the ruble aren’t guaranteed to hold up long term, however, and foreign brokers and traders are quite wary of dealing in a currency that only is as strong as the Kremlin demands that it be.

Moreover, the currency will come under renewed pressure as Russia faces big payments on debt denominated in foreign currencies. So far, Russia has avoided default on these. But its access to its foreign reserves is frozen, and many question whether it can continue to hold out by relying on the influx of petrodollars alone. Putin desperately needs the public relations win that a recovered ruble presents, but the Potemkin village cannot withstand market forces forever. Eventually, the ruble will have to be freely traded once again or Russia will become a fully closed society, at which point no one may want its currency at all.