Russian ruble recovers, Putin demands oil payments in rubles only
Russian ruble recovers, Putin demands oil payments in rubles only
WASHINGTON DC, April 7, 2022 - As the Russian Ruble fights its way back to where it was before Putin invaded Ukraine, after a massive beating due to Western sanctions on Moscow, Vladimir Putin has decreed that Western countries must start paying for gas through a Russian bank that will transfer foreign currency into rubles.
On Thursday, Putin demanded foreign countries open accounts at Gazprombank to pay for Russian gas. He said he would suspend gas supply contracts if "unfriendly" countries fail to comply with the order. Putin said the decision comes into effect on April 1.
Putin had initially insisted that foreign countries pay for gas in rubles — a move seen as a bid to save Russia's economy, which has been hit by Western sanctions for the war in Ukraine.
Germany and other Western countries had firmly rejected the demand to pay for Russian gas in rubles, saying it was a breach of contracts that had been agreed with Russia.
Following Russia's invasion of Ukraine on February 24, one of the most notable economic fallouts for Moscow came in the form of a crashing ruble. The currency kept sinking to record lows against the US dollar as the economic sanctions imposed by the United States and other Western countries piled up.
The ruble has surged all the way back to where it was before Putin invaded Ukraine, closing at 79.7 in Moscow on Wednesday https://t.co/vZgkR43dux pic.twitter.com/7IYEqJaWzw
— Bloomberg (@business) April 7, 2022
For the most part, the foreign currency reserves held by the Russian central bank were frozen and rating agencies downgraded Russia's credit rating to rock bottom. In early March, the ruble had crashed by more than a third.
The ruble has since recovered and is now trading around levels last seen before the invasion in a sign that the initial impact of sanctions, some of the harshest in history, could be wearing off. However, the United States is claiming that the ruble's recovery is being fueled by "a lot of manipulation."
Much of the recovery can be attributed to a steep rise in revenues from oil and gas exports and a sharp drop in imports. Bloomberg Economics expects Russia will earn nearly $321 billion (€292 billion) from energy exports in 2022, up more than a third from last year, if its major customers, including the European Union, continue buying Russian oil and gas.
Experts say the rest of the rebound is a result of the ruble being artificially propped up by the Russian central bank through capital controls.
"The currency moves don't represent the fundamentals of Russia. More often than not, you see the fundamentals reflected in the currency. But as soon as capital controls are put in place, then that obscures the picture," said Craig Erlam, senior markets analyst at OANDA.
"There's no way you can say the Russian economy now has the same outlook as it did in the middle of February before the invasion started, even if the currency would suggest that," he told DW.
The Russian economy, which the IMF in January forecast would grow 2.8% this year, is now predicted to shrink 10%-15%.
According to a report by DW, as the ruble tanked in the wake of the invasion and the ensuing Western sanctions, the Russian central bank got into firefighting mode to rescue the sinking currency.
Under Putin's plan, Gazprombank will serve as an intermediary — converting foreign money into rubles
The ruble got another major boost when Russian President Vladimir Putin demanded that "unfriendly" countries pay for Russian gas in the Russian currency instead of euros or dollars.
Putin, however, climbed down from his initial position and allowed foreign buyers to continue paying in foreign currency but only after opening special accounts at Russia's Gazprombank, which would convert the payments into rubles.
"It's effectively just artificially supporting the ruble while appearing to be forcing buyers in hostile countries into utilizing the ruble currency," Erlam said. "It's like the measures that have been imposed on Gazprombank and others already in terms of forcing them to convert 80% of their currency payments into rubles. This further supports those types of desperate measures."
The ruble is now trading around levels last seen before the invasion
In the days following the start of Russia's invasion of Ukraine on February 24, one of the most notable economic fallouts for Moscow came in the form of a crashing ruble.
The currency kept sinking to fresh record lows against the US dollar as Western sanctions piled up, much of the foreign currency reserves held by the Russian central bank were frozen and rating agencies downgraded Russia's credit score to junk. At one point in early March, the ruble had crashed by more than a third.
US Secretary of State Antony Blinken has said the ruble's resurgence was being driven by "a lot of manipulation."
"People are being prevented from unloading rubles," Blinken told NBC on Sunday. "That's artificially propping up the value. That's not sustainable. So, I think you're going to see that change."
Ruble trading volumes have dried up due to sanctions and many brokers and speculators remain wary of dealing in the currency. This means that the ruble's current market price is being determined by far fewer transactions than usual.
However, according to DW, despite the recent upswing, the ruble's outlook appears less rosy in the longer term.
The Russian currency, which has weakened considerably against the dollar over the past two decades, is expected to struggle further as the West looks to swiftly wean itself off Russian oil and gas, a lifeline for Russia's economy, says DW.
