Russia's ruble reached its strongest level in 7 years despite massive sanctions. Here's why (2023)

A Russian one ruble coin and Russian flag displayed on a screen are seen in this multiple exposure illustrative photo taken on March 8, 2022 in Krakow, Poland.

Jakub Porzycki | Nurfoto | Getty Images

of RussiaRubelhit 52.3 against the dollar on Wednesday, its strongest since May 2015. As of Thursday afternoon in Moscow, the currency was trading at 54.2 against the greenback, slightly weaker but still close to a seven-year high.

That's a world away from its plunge to 139 against the dollar in early March, when the US and European Union began imposing unprecedented sanctions on Moscow in responseinvasion of Ukraine.

The ruble's staggering rise in the months that followed is cited by the Kremlin as "proof" that Western sanctions aren't working.

Russia's ruble reached its strongest level in 7 years despite massive sanctions. Here's why (1)

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"The idea was clear: break up the Russian economy by force," said the Russian presidentWladimir Putinsaid last week during the annual International Economic Forum in St. Petersburg. "They didn't succeed. Obviously that didn't happen."

At the end of February, after the ruble's initial collapse and four days after the start of the February 24 invasion of Ukraine,Russia has more than doubled the country's main interestto a whopping 20% ​​from the previous 9.5%. Since then, the currency's value has improved enough to cut the interest rate three times to 11%.Still May.

In fact, the ruble has become so strong that the Russian central bank is taking active measures to try to weaken it, fearing it will make the country's exports less competitive.

But what's really behind the currency's rise, and can it last?

Russia achieves record revenues from oil and gas

Put simply, the reasons are strikingly high energy prices, capital controls and sanctions themselves.

Russia is theworld's largest gas exporterand thesecond largest oil exporter. His main customer? The European Union, which buys billions of dollars worth of Russian energy every week while trying to punish them with sanctions.

This has put the EU in a difficult position – it has now sent exponentially more money to Russia for oil, gas and coal purchases than it has sent to Ukraine in aid, which has helped fill the Kremlin's war chest. And withBrent crude oilPrices 60% higher than this time last year, although many Western countries have curtailed their Russian oil purchases, Moscow is still making record profits.

Russian President Vladimir Putin and Defense Minister Sergei Shoigu attend a wreath-laying ceremony marking the anniversary of the start of the Great Patriotic War against Nazi Germany in 1941 at the Tomb of the Unknown Soldier by the Kremlin wall in Moscow, Russia, March 22, 2022.

Mikhail Metzel | Sputnik | Reuters

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In the first 100 days of the war between Russia and Ukraine, the Russian Federation made $98 billion in revenues from fossil fuel exports.afterthe Center for Research on Energy and Clean Air, a research organization based in Finland. More than half of that revenue came from the EU, about $60 billion.

And while many EU countries intend to reduce their dependency on Russian energy imports, that process could take years — in 2020, the bloc relied on Russia for 41% of its gas imports and 36% of its oil imports, according to Eurostat.

Yes, thatThe EU passed a landmark package of sanctions in Maypartial ban on Russian oil imports until the end of this year, but there were significant exemptions for oil delivered by pipeline, as landlocked countries like Hungary and Slovenia lacked access to alternative sources of oil transported by sea.

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"This exchange rate that you see for the ruble is there because Russia is running record foreign exchange current account surpluses," Max Hess, a fellow at the Foreign Policy Research Institute, told CNBC. This income is mainly generated in dollars and euros through a complex ruble swap mechanism.

“Although Russia may be selling a little less to the West at the moment as the West moves to cut [dependence on Russia], they are still selling a ton at oil and gas prices at all-time highs. So that brings a lot of a current account surplus."

Russia's current account surplus from January to May this year was just over $110 billion, according to the Central Bank of Russia -more than 3.5 times the same period last year.

Strict capital control

Capital controls - or government limits on foreign exchange outflows - have played a big part here, plus the simple fact that sanctions have restricted Russia from importing as much, meaning it's spending less of its money to get around to buy things from elsewhere.

It's really a Potemkin course because it's incredibly difficult to send money abroad from Russia, given the sanctions - on both Russian individuals and Russian banks.

Max Hess

Fellow, Foreign Policy Research Institute

"The authorities implemented quite strict capital controls as soon as the sanctions were imposed," said Nick Stadtmiller, director of emerging markets strategy at ‎Medley Global Advisors in New York. "The result is money flowing in from exports while there are relatively few capital outflows. The net effect of all this is a stronger ruble."

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Russia has now eased some of its capital controls and lowered its interest rate to weaken the ruble, as a stronger currency is actually hurting its budget account.

The Ruble: Really a “Potemkin Rate”?

Now that Russia is cut off from the international SWIFT banking system and prevented from trading the dollar and euro internationally, it is essentially left to trade with itself, Hess said. This means that while Russia has built up a sizeable volume of foreign exchange reserves to support its currency domestically, sanctions prevent it from using those reserves to meet its import needs.

The ruble's exchange rate "is really a Potemkin rate because, given the sanctions -- on both Russian individuals and Russian banks -- it's incredibly difficult to send money abroad from Russia, let alone Russia's own capital controls," he said Hess.

In politics and economics, Potemkin refers to fake villages supposedly built to give the Russian Empress Catherine the Great an illusion of prosperity.

"So yes, the ruble is a bit stronger on paper, but that's the result of import slumps, and what's the point of building foreign exchange reserves than buying things from abroad that you need for your economy?" And Russia can't do that."

People queue near euro and US dollar rates at ruble signs at the entrance of the exchange office on May 25, 2022 in Moscow, Russia. Russia neared a default on Wednesday after the U.S. Treasury Department expired a key exemption from sanctions.

Konstantin Zavrazhin | Getty Images

"We should really look at the underlying problems in the Russian economy, including skyrocketing imports," Hess added. "Even if the ruble has a high value, it will have a devastating impact on the economy and the quality of life."

Does this reflect the actual Russian economy?

Does the strength of the ruble mean that Russia's economic fundamentals are sound and have escaped the blow of sanctions? Not so fast, analysts say.

"The strength of the ruble is associated with a surplus in the overall balance of payments, which is driven much more by exogenous factors related to sanctions, commodity prices and policy measures than by longer-term underlying macroeconomic trends and fundamentals," said Themos Fiotakis, Head of FX Research at Barclays.

This was announced by Russia's Ministry of Economic Affairs in mid-Mayit expects unemployment to reach almost 7%this year, and that a return to 2021 levels is unlikely until 2025 at the earliest.

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Since the start of the Russian war in Ukraine, thousands of international companies have left Russia, leaving large numbers of Russians unemployed. Foreign investment has taken a massive hit, andIn the first five weeks of the war alone, poverty almost doubledalone, according to Russia's federal statistics agency Rosstat.

"The Russian ruble is no longer an indicator of the health of the economy," said Hess. “While the ruble has surged thanks to Kremlin interference, its inattention to Russia's well-being persists. Even Russia's own statistics agency, famous for massaging numbers to meet Kremlin goals,recognized thatThe number of Russians living in poverty increased from 12 [million] to 21 million people in the first quarter of 2022.”

Whether the ruble's strength can be maintained, Fiotakis said: "It is very uncertain and depends on how geopolitics develops and politics adapts."


1. The Sanction-Fueled Destruction of the Russian Aviation Industry
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2. Russia's Economy is F***ed: Here's 3 Reasons Why
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3. Jokes On Us, The Russian Ruble Is Stronger Than Ever…
(Logically Answered)
4. The real impact of Western sanctions on Russia
5. How Russia’s Ruble Comeback May Boost Global Inflation and Recession Risks
(Dion Rabouin | WSJ)
6. Sergei Guriev on the political economy of Putin’s war in Ukraine: Global Economy Lecture 2023
(The Vienna Institute for International Economic Studies)
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