The ruble is being the best currency against the dollar this year and this is the explanation

With the monetary policy of the Federal Reserve, the dollar is positioned as a strong currency this year. However, there is a currency that manages to take the lead and position itself as the most appreciated currency in the world. We are talking about the ruble that has risen 15% so far this year against the dollar.

If we look back, after Russia’s warlike advance in Ukraine, a series of sanctions were imposed in terms of mobility and the most relevant, the financial ones, which we summarize below.

Sanctions to attack the ruble

First, limited the ability of the Russian state and government to access markets and EU capital and financial services, to strangle funding for aggressive policies.

Sanctions were also launched on the financial sector that will reduce Russia’s access to the most important capital markets, targeting 70% of the Russian banking marketbut also to key state-owned companies, including the defense field.

Exclude the main Russian banks of the SWIFT system, the world’s dominant financial messaging system. This measure sought to prevent these banks from carrying out their financial transactions around the world quickly and efficiently.

Following these decisions, if the Ruble/US Dollar ratio was trading at $0.0132 at the start of the year, sank to $0.0069, low set on March 7.

However, in the commercial axis, there was no forceful action due to the heavy dependence on Russia for energy by several neighboring European countries. Some Russian exports were highlighted and the most prominent part are various imports such as quantum computing, advanced semiconductors, sensitive machinery, transport and chemical products.

And it is that Russia supplies about a third of Europe’s consumption of natural gas, which is used for heating in winter, as well as for electricity generation and industrial production. The European Union also turns to Russia for more than a quarter of its crude oil importsthe largest single power source on the block.

And this commercial dependency has been the key point for the response of Putin to stabilize the ruble.

Faced with sanctions, create an artificial demand for rubles

Russia’s response has been multiple. As of February 28, the Central Bank of Russia fired interest rates up to 20% in order to offer value to your currency. This ensured an increase in deposit rates to the levels necessary to offset the higher risks of depreciation and inflation.

At the same time, the path to an artificial demand for rubles was taken. On the one hand, Russian export companies were forced to sell 80% of foreign currency which they entered to subsequently acquire rubles.

To limit the information on how the Russian bank was doing and that the West will take the pulse of the sanctions, the Bank of Russia made a decision to temporarily reduce the volume of disclosed reports grouping its financial statements by credit institutions on their websites and also on the website of the Bank of Russia. The aim was to limit the risks of credit institutions associated with the sanctions imposed by Western countries and not contribute to pessimism in the evolution of their stock market or their currency.

Seeking not to lose foreign currency in this financial war, on March 9 it was decided that until September 9 all client funds in accounts and deposits in foreign currency have been preserved and accounted for in the currency of the deposits. Customers can withdraw up to US$10,000 in cash and the remaining funds in rubles at the market exchange rate on the date of withdrawal.

To make matters worse, it is required that the purchase of gas be in rubles. It has reached such an extreme that countries that refuse to pay in rubles have suffered gas supply cuts.. The list of those affected includes Poland, Bulgaria, Finland and the Netherlands. There is no contractual obligation with Gazprom Export to meet payments in rubles, but the Kremlin rules.

In addition, Russia has found itself with a record current account balance after rising oil and gas prices and restricting imports. The current account balance surplus widened to $58.2 billion in the first quarter of 2022 from $22.2 billion in the same period last year, the largest current account surplus since available records began in 1994. Exports have grown by 55% and imports by only 14%.

Leave a Comment