🎢 Russian Ruble’s Roller Coaster Ride
Here’s how the ruble went from the world’s worst-performing currency to the best-performing currency in just months.
Russia has seemingly had a massive reversal in fortune in just the last few months.
Because of the war with Ukraine, the country had been slammed with several economic sanctions.
G7 countries (Germany, the UK, the US, Japan, South Africa, Canada, France, and Italy) have all frozen Russia's central bank assets in their control.
It has a massive $630 billion in foreign exchange reserves, but it is unable to use a large part of it (you can read more about these sanctions here).
Most countries pulled out all the money they had invested in Russia, causing the ruble to fall to an all-time low. As the ruble fell, so did the purchasing power of the country, making things more expensive and raising the cost of imports.
But now ruble is the world’s best-performing currency and is almost at a 5-year high.
This is despite the fact that companies like Mcdonald's and Starbucks are exiting it.
So, how did this reversal in fortune happen?
✨ Not All That Glitters is Gold
Every country has a few tricks up its sleeves to boost its currency when it starts declining.
Wondering how Russia intervened?
First, it raised interest rates from 9.5% to 20%.
How would this help?
Raising the interest rates makes the country more attractive to foreign investors (as they get higher returns on investments).
This would increase the supply of foreign currency in the market, thus decreasing its value a little and raising the value of the ruble.
Second, it made it mandatory for all exporters to swap 80% of the foreign exchange they get into rubles.
And since Russia exports a lot of products, the demand for the ruble in the market increased, further raising its price.
Third, it asked countries that import fuel and natural gas from it to pay in rubles.
This achieved the same goal: raising the ruble’s price.
But this doesn’t mean that all of Russia’s troubles are over.
Financially it is still in more or less the same position.
In fact, some experts estimate that ruble’s true value should be 180 per dollar.
This is why average ruble trading volumes have gone down to their lowest in a decade!
And with Russia lifting some of these capital controls (it has decreased the interest rate to 17% and reduced the foreign exchange swap cap to 50%), this could decline further.
But wait, why is Russia lifting capital controls now?
Because a too high ruble price is also not good for the country.
Most nations are already wanting to cut off trade relations with Russia.
A very high ruble (which makes exports expensive) could also alienate the few countries willing to trade with it.
And what’s more, the country could also soon have to default on its loan payments.
Russia is due to give bond payments to investors on May 27.
But the US is planning to cut its access to foreign reserves stored in its banks (it had so far allowed Russia to use these reserves for loan payments).
This means Russia will either have to give away whatever little liquid foreign currency it has (most investors would not be willing to accept the volatile ruble right now) or default on loans.
Both options are equally bad and could further alienate foreign investors and companies.
Whatever be the case Russia seems confident that it will be able to pay off its debt with ease.
Now, we’ll have to wait and watch whether it is actually able to do so or will the war with Ukraine cause more financial problems.
⚡ In a line: Russia has managed to make the ruble this year’s best-performing currency but more financial woes lie ahead of the country.
💡 Quick question: Will Russia go bankrupt thanks to its fight with Ukraine?
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