“There is simply nowhere else to put the currency…” Experts explain the new growth of the ruble

The news that the European Union has prepared a sixth package of sanctions, which includes a phased oil embargo and the disconnection of Sberbank from SWIFT, caused a sharp strengthening of the ruble, which reached new 2-year highs. By the end of trading on the Moscow Exchange, the dollar exchange rate fell by 4.66 rubles, to 66.3, the lowest since March 2020. The euro fell under 70 rubles for the first time since February 2020, but closed the day a little higher - at 70.4425 rubles, with a depreciation of 4.31 rubles.

Most analysts explain the current situation by the fact that Russian exports exceed imports, and therefore exporters' foreign exchange earnings put pressure on the foreign exchange market. Exporters sell more currencies than importers buy, and therefore the dollar is falling.

A banker from a large state-owned bank, on condition of anonymity, explained that the currency for energy flows to Russia at a rate of $ 1 billion a day, but there is no one to buy such a volume: the supply of goods from abroad is paralyzed, Russians are prohibited from withdrawing large sums abroad, and foreign investors are completely cut off from trading.

“Currency - non-cash dollar and euro - in Russia there is nowhere to put it, the banker complains. In addition, in anticipation of sanctions, a number of market participants cut their currency positions, he continues. They are getting rid of the currency, because after switching off SWIFT, they may no longer need it. (…) The market has been put into deep anesthesia by the measures of the Central Bank. And if nothing changes, in May-June the ruble may strengthen against the dollar to 60 rubles or less. This is uncomfortable for the budget and exporters, but it will help imports…”

We don't save up for a "rainy day" anymore

Another banker, Sergey Vasiliyev, believes that in Russia exports have always exceeded imports, but before, there was no such situation with the strengthening of the ruble, but now it suddenly happened. Why?

“Many people explain this by the restrictions imposed on the movement of capital of foreigners, they say, in response to the freezing of our gold reserves, the Central Bank imposed a ban on the withdrawal of funds from foreigners, and now they are not putting pressure on the ruble. But this does not explain the situation either. We may have had a total outflow from the capital account, but it still did not cover the trade surplus. Export earnings were still higher.

I think the main reason now is still different - the abolition of the "budget rule", which was once invented and introduced by Kudrin.

His idea was that with rising energy prices, budget excess revenues should be put aside in the National Welfare Fund. And then, convert these funds back into dollars / euros and place them in the West as the Central Bank's gold reserves.

It will be like a "stash" for a rainy day!

As a matter of fact, it was precisely by such an action, the conversion of budget revenues back into foreign currency, that the overhang of excess foreign exchange earnings was removed.

We simply left part of the foreign exchange earnings received by the country in the same place in the West. And it turned out that even with the excess of exports over imports, our ruble had not strengthened before, but on the contrary, it even fell over the years. We now know what happened to that currency "stash" - it was frozen. Perhaps forever.

And now the Ministry of Finance has naturally canceled this "budget rule" and will never again convert budget revenues into foreign currency and store them in the West.

Now the budget will spend all taxes on budget expenditures, without the "stash" in the West. In such a situation, our Ministry of Finance and the Central Bank have not yet lived, and therefore they are at a loss.

Now the ruble will only get stronger and stronger until the balance of exports and imports equalizes. And at what rate this will happen now, no one knows..."

The strengthening of the ruble is a sign of an imminent recession

The Kremlin presents exchange rates as a victory over sanctions. But in reality, this is an illusion, notes IIF economist Robin Brooks.

The country risk of Russia, measured by CDS quotes, is now at about the same levels where it was in the first, shock, weeks of the special operation. This means that the rising ruble is the result of bans on foreign exchange transactions and control measures of the Central Bank.

The rise of the ruble gives the false impression that financial conditions in Russia are normalizing, but this is not the case, Brooks continues: the economy is heading for the worst recession since the early 1990s and could lose 15% of GDP by the end of the year.