After initially plummeting, the Russian rouble has recovered all its invasion-related losses and then some, and is currently the best-performing currency of 2022, up around 11% against the USD.
This probably feels a little counterintuitive.
The entire Western world has basically collectively sanctioned Russia. The US has even trotted out what’s always been touted as the financial nuclear option: barring Russian banks from using SWIFT. To be fair, they didn’t completely bar them from SWIFT, and SWIFT is simply a messaging system that represents convenience and uniformity in bank communication more than anything else, however the optics of this move are unprecedented.
Yet Russia’s currency has managed to strengthen while being the world’s pariah. It makes sense when you consider the bulwark of Russia’s economic output and exports, weighed against how it consumes resources from the rest of the world.
Russia was already running a large current account surplus, and is now exporting about twice as much as they import. Its current account surplus actually hit a record in Q1 2022. They’ve been able to maintain this large ratio in their favor, even with the sanctions. How?
Russia’s exports are not easily replaced: they're commodities, namely energy. They supply most of Europe’s natural gas and are the 4th largest oil producer in the world. You can’t just stop buying these products. To outright stop buying Russia’s commodity exports would not only put a lot of the West in an impossible energy situation, it would also dramatically increase the costs of said commodities by effectively removing all that supply from markets. It's just not happening.
To add to this, Russia has been demanding payments for its natural gas exports in roubles; forcing economies to swap their currencies for roubles in order to receive delivery. This forced bid has certainly helped too.
In conjunction, Russia has had its ability to purchase goods and services from the West diminished via these sanctions. "You can’t buy our goods as punishment!" However, most of what Russia imports are manufactured goods and services. These are much easier to substitute than natural resources. Or maybe you just don’t buy anything to replace the sanctioned good; do Russians really have to replace their Netflix subscriptions with something else?
So you’ve denied Russia from buying many Western goods, but really can’t deny Western nations from buying most Russian goods. Current account go up, which is good for the rouble.
Additionally, Russia is a long-time net capital exporter. I’m sure it doesn’t surprise you to know that more Russians buy apartments in London than Brits buy apartments in Moscow. Wealthy Russians tend to consume Western goods, property, etc.., but the West doesn’t reciprocate this and spend the same amount in Russia (even before sanctions). By reducing the ability and willingness of Russians to buy assets kept in other nations (the West has not been respecting property rights of Russians and has been seizing assets), you’ve kept more roubles in Russia.
Considering the West’s willingness to seize private assets of Russian citizens, it’s likely that after relations normalize, we may see a permanent change in consumption patterns from citizens of nations not deemed friendly to the West (namely Chinese and Russian consumers).
So now you have roubles with less avenues to be spent, coupled with a current account trade dynamic that strongly favors Russia. It’s easy to see how the rouble has and will likely continue to be a beneficiary of these sanctions, should they continue.
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