April 12, 2022

The Ruble Rally Is Real. Sanctions Are a Moving Target.

Shortly after Russia’s invasion of Ukraine on Feb. 24, the European Union, the U.S., and their international partners imposed unprecedented sanctions on the Russian financial system. The targets included the Bank of Russia. Around $300 billion out of $640 billion of its assets were frozen, causing domestic bank runs and sharp ruble depreciation. Yet, just a few weeks later, the Russian currency has recovered most of its losses and is trading at precrisis levels. What happened?

The ruble is strengthening due to exceptionally high foreign exchange inflows from energy sales, tight capital controls on ruble convertibility, and low market liquidity. Is this a freely market-determined exchange rate? No, it is not. But ruble stability is at the same time “real,” in the sense that it’s driven by Russia’s all-time-high current account inflows.

Due to the Bank of Russia’s skilled policy response and Russia’s likely large current account surplus, sanctions have become a moving target.

The Bank of Russia reacted to sanctions swiftly by more than doubling its policy rate on Feb. 28 from 9.5% to 20% and providing liquidity support. However, as the ruble has recently appreciated and the financial system beginning to stabilize, the Bank of Russia surprised the market with a 300-basis-point cut in the policy rate to 17%, signaling that it is concerned more about a deceleration in economic growth than financial instability. The Bank of Russia also eased some of the ruble convertibility restrictions.

Early on, the Bank of Russia tried to stabilize the market by using its foreign reserves but was forced to stop following the asset freeze and resorted to severe capital controls. Still, the central bank lost $38.8 billion in reserves from Feb. 18 to March 25, bringing total reserves down to $604 billion (including frozen assets).

Read the full article from Barron's.

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