The Russian ruble hit a rate of 52.3 per $1 last Wednesday, up about 1.3 percent from Tuesday and reaching its strongest level since May 2015, CNBC writes.

But this strengthening of the national currency is not too favorable for the Russian Central Bank, which is now puzzling over how to “tame” its exchange rate on fears that exports could suffer and become less competitive.

Today, the ruble-dollar exchange rate is far from the 139 rubles per $1 that was established in early March, when the U.S. and the European Union had just begun imposing unprecedented sanctions against Moscow. The ruble’s stunning rise in the following months was proof that Western sanctions don’t work.

As President Putin said last week during the annual St. Petersburg International Economic Forum, “The idea [of the West] was clear: to violently crush the Russian economy. But they did not succeed.”

After the start of Russia’s special operation in Ukraine and the initial collapse of the ruble, Russia more than doubled its key interest rate from the previous 9.5% to 20%, but since then the value of the national currency has improved to the point where the Central Bank has had to cut the rate three times, reaching 11% at the end of May.

Let’s try to get to the bottom of what’s really behind the ruble’s rise.

As you know, Russia is earning record revenues from energy, oil and gas exports, and the reasons for this are simple: staggeringly high commodity prices, capital controls and the sanctions themselves.

However paradoxical the situation may seem, it is quite real: Russia, as the world’s largest gas exporter and second largest oil exporter, sells these resources to the European Union, which pays billions of dollars for them every week, while trying to impose sanctions on Russia.

The EU is in a very awkward position – it has sent exponentially more money to Russia to buy oil, gas and coal than it has sent to the same Ukraine in the form of aid. And given that Brent oil prices are 60% higher today than at this time last year, despite many Western countries cutting back on their purchases, Moscow is still making record profits.

It is estimated that in the first 100 days of the conflict in Ukraine, Russia received $98 billion in revenue from fossil fuel exports, with more than half of that revenue coming from the EU, amounting to about $60 billion.

And while many EU countries have stated that they intend to reduce their dependence on energy imports from Russia, so far these statements remain unsubstantiated, as such a process could take years: according to Eurostat, in 2020 the bloc was 41% dependent on Russia for gas imports and 36% dependent on Russia for oil imports.

Despite 6 EU sanctions packages against Russia and a partial ban on Russian oil imports by the end of this year, it has significant exemptions for oil delivered by pipeline, as a number of landlocked countries such as Hungary and Slovenia cannot access alternative sources of oil sent to them by tanker.

“The ruble exchange rate has become what you see because Russia is running a record foreign currency current account surplus,” said Max Hess, a research fellow at the Foreign Policy Research Institute. – “These are gains mostly in dollars and euros, generated through a complex ruble swap mechanism.

“While Russia may already be selling a little less of its energy resources to the West as the West prepares to end its dependence on Russia, it is still selling tons of oil and gas at record high prices. So it’s bringing in a big current account surplus.”

According to the Central Bank of Russia, Russia’s current account surplus from January through May this year totaled just over $110 billion – that’s more than 3.5 times more than in the same period last year.

The second reason for the ruble’s appreciation was the timely capital control measures, or rather, the government’s restriction of foreign currency exported from the country, plus the fact that Russia no longer imports as many goods as it used to because of sanctions, which means it spends less of its money buying goods from other countries.

Nick Stadtmiller, director of emerging markets strategy at Medley Global Advisors in New York, said,


“The country’s authorities imposed pretty strict capital controls as soon as the sanctions came into effect, and as a result, money is coming in from exports, while capital outflows are relatively small. The net effect of all this is a strengthening of the ruble.”

Although it should be recognized that Russia has now relaxed some capital controls and lowered interest rates in an attempt to weaken the ruble, as strengthening the currency actually hurts the budget account.

In effect, being cut off from the international banking system SWIFT and locked out of international trade in dollars and euros, Russia has to almost trade with itself. And although a huge amount of foreign exchange reserves have been accumulated to support the ruble domestically, these reserves cannot be used to meet import needs because of the sanctions.

In addition, it is incredibly difficult to send money from Russia abroad given the sanctions on both Russian individuals and Russian banks.

On the one hand, the ruble has become a little stronger, but this strengthening seems artificial, caused by the collapse of imports, and therefore there is little point in building up foreign currency reserves if you can’t buy abroad what the economy needs, for example, high-precision equipment and technology. This, unfortunately, is exactly what Russia cannot do.

So today the main problem of the Russian economy seems to be the reduction of imports, the devastating impact of sanctions on the economy and the quality of life of the population.

As we can see, the ruble’s stability is related more to the surplus of the overall balance of payments, which is due to exogenous factors related to sanctions, high commodity prices and political measures, than to long-term basic macroeconomic trends and fundamentals.

We should not forget about the rise in unemployment as foreign companies leave Russia. According to the Russian Ministry of Economy, it expects unemployment to reach nearly 7% this year, and a return to 2021 levels is unlikely before 2025.

Also, according to Rosstat, foreign investment has been hit hard, and poverty in the country has almost doubled in the first five weeks alone since the conflict began.

It can be concluded that the Russian ruble is no longer an indicator of the health of the economy, and whether it can be kept strong is a matter of great uncertainty and depends on how geopolitics and policy adjustments unfold.