The Russian ruble has defied all predictions that it would collapse under the weight of painful sanctions imposed on Moscow by the West. Immediately following its invasion of Ukraine on February 24, Russia was battered by a series of punitive economic measures that saw the ruble plunge to an all-time low of 119 against the United States Dollar (USD) on February 27; a month later, the currency continued its downward cascade, trading at 143 to the greenback. However, since then, the ruble has made unexpected gains and was trading nearly 30% higher than the USD on May 23. In fact, it surpassed the Brazilian real to emerge as the world’s best-performing currency so far this year.
Furthermore, alongside the ruble’s rally, consumer confidence in the Russian economy and the ruble has been optimistic. According to the Consumer Confidence Index (CCI), the Russian consumer’s optimism about the economy has continued to rise despite the war and hit a peak of 97.6 points in February.
President Vladimir Putin even took the time to call out the West for the supposed ineffectiveness of the sanctions and indicated that the Russian economy would continue to weather the storm. Putin said in April that the “strategy of the economic blitz has failed” and that “Russia has withstood the unprecedented pressure.” He also pointed out that Western sanctions had backfired, as their economies have been the ones that have suffered badly. He said a month later that the ruble was stable, unemployment was at a historic low, inflation had subsided, and that the state has been spending more on welfare.
Experts, however, disagree with Putin’s statements and argue that the ruble’s rally is artificial and that Russia has taken specific measures to ensure that the currency remains stable, albeit temporarily. According to William Jackson, an economist at Capital Economics, Russia has inflated the ruble’s value by implementing temporary measures aimed at displaying that the ruble can withstand sanctions. The White House, too, believes that Moscow is “artificially propping up” the ruble and has been taking coercive steps to ensure that the ruble remains inflated.
In response to the sanctions, Moscow demanded that European Union countries, which heavily depend on Russia for natural gas, make payments in rubles rather than dollars. This step not only resulted in increasing the ruble’s demand in European markets but also acted as a counter to Western sanctions, which were largely predicated on the premise that Russia would not be able to use dollar and euros in the international market. An analysis by The Guardian states that “dollars and euros are less useful to Moscow while sanctions are tightening” and hence, the Kremlin prefers trading in rubles.
Furthermore, the Kremlin ordered export-oriented businesses to convert 80% of their foreign currency into rubles. Moscow also raised interest rates, forcing Russians to hold the ruble, and mandated that citizens would not be allowed to withdraw more than $10,000 in foreign currency. These moves were aimed at increasing the demand for the ruble and ensuring the Russians have fewer reasons to trade in foreign currencies.
Additionally, the Kremlin’s propaganda that sanctions have not impacted the economy and its restriction of foreign media led to citizens believing that the economy is performing well. This was also one of the reasons why consumer confidence in the economy soared in March.
However, despite efforts to prop up the ruble and consumer confidence, the Russian economy has continued to wither away under the impact of sanctions. In fact, according to Jackson, “sanctions are hurting Russia’s economy hard,” irrespective of whether the ruble’s value has been inflated or not.
A report by the United States Congressional Research Service states that “Russia’s economy is worse off than it was before Russia expanded its invasion of Ukraine,” with the International Monetary Fund (IMF) saying that the economy will contract by 8.5% in 2022 and inflation will rise to 24%. The report also notes that foreign companies are leaving Russia in droves and imports are expected to fall by 25% this year.
Another analysis by Deloitte predicts that Russia’s economy will “suffer” as a result of the sanctions, as foreign companies would be reluctant to conduct trade with Russia. In fact, credit rating agencies like Fitch and Moody’s have downgraded Moscow’s ratings to negative, a move meant to isolate companies from doing business with Russia. This “could lead to shortages of consumer goods as well as key inputs used in Russian production,” according to Deloitte. Furthermore, it would significantly raise the price of imported goods and reduce the real purchasing power of Russian consumers, which would in turn result in the contraction of its GDP.
In fact, on Sunday, Russia defaulted on its foreign debt for the first time in over a century, in the latest sign that the Russian economy is continuing to unravel. The removal of Moscow from global payments systems like SWIFT has closed avenues for Russia to pay its debts. Moreover, sanctions froze Russia's foreign reserves and Moscow's foreign currency bond issuer, the National Settlement Depository, has also been recently sanctioned. While the short-term effects on Russia’s economy as a result of the default are uncertain, the West has claimed that its economy will suffer in the long-term
Finance Minister Anton Siluanov dismissed reports of a default as a farce, saying “Anyone can declare whatever they like,” adding, “But anyone who understands what’s going on knows that this is in no way a default.” He said Russia has the funds to pay off its debts and in fact plans to borrow even more, adding that the situation has merely been prompted by Russia’s inability to access its foreign reserves. However, despite its best efforts to project an image of strength in the face of escalating sanctions, both to maintain public morale and its global standing, its economy is clearly reeling. Its leadership, however, have shown no signs of retreating, as sanctions have failed to coerce Russia into halting the war or even making concessions. The question is now how long it can continue masking its economic deterioration, with its illusion already showing signs of cracking under intense pressure.
The Russian Economy Isn’t Doing as Well as Putin Will Have You Believe
Despite efforts to prop up the Rouble and consumer confidence, the Russian economy has continued to wither away under the impact of sanctions.
June 30, 2022
IMAGE SOURCE: GETTY IMAGES