Russia: Ruble recovers lost ground despite worsening economic backdrop
The Central Bank’s unprecedented monetary policy tightening and draconian capital and foreign exchange controls seem to have mostly stabilized the macro-financial situation in Russia in recent weeks, allowing the ruble to rebound from early March’s all-time low. As such, despite western countries and their allies continuing to ramp up sanctions against the country, the ruble recovered most of its previous losses against the U.S. dollar by the end of March. On 1 April, the RUB traded at 83.4 per USD, appreciating 12.2% month on month. However, the currency was down 10.9% in year-to-date terms and was 9.3% weaker on a year-on-year basis.
In light of unprecedented international sanctions, including those on the Central Bank’s reserves, Russian authorities introduced draconian capital and foreign exchange controls in order to prevent the collapse of the financial system and support the ruble. The measures, which included prohibiting international transfers and limiting foreign currency exchanges for private citizens, banning banks’ and brokers’ operations of cash-based foreign exchanges for dollars and euros, shutting down the Moscow stock market, and forcing private companies to convert 80% of their foreign currency proceeds into rubles, have largely succeeded in fending off a collapse of the country’s financial system.
In mid-March, authorities averted Russia’s sovereign debt default and restarted limited trading of OFZ government bonds soon after, thus supporting the ailing ruble. Meanwhile, the rollout of additional international sanctions appears to have had little impact on the Russian currency in recent weeks. While Western allies moved to abolish Russia’s ‘most-favored nation’ trade status, thus enabling imports bans and punitive tariffs, and announced plans to limit their reliance on Russian energy—with the U.S. and the UK banning Russian energy imports—higher global energy prices boosted foreign revenue inflows, likely boosting current account surplus and boding well for the ruble.
Looking ahead, the economic outlook remains highly volatile. Provided that the Russia-Ukraine war drags on or even escalates, which appears as the most likely scenario in the short- to medium- term, much will depend on the willingness of Western countries and their allies to roll out additional sanctions, especially on Russia’s lucrative energy exports sector. Our panelists expect the economy to slip into deep recession this year, while the ruble is forecast to weaken markedly from its current level as international sanctions weigh on the Centra Bank’s ability to prop up the currency. That said, in the absence of sanctions on energy exports, Russia’s current account surplus could increase markedly in 2022 as imports dry up while commodity exports remain resilient, thus supporting the ruble.
Commenting on Russia’s economic outlook, Chiara Silvestre and Marco Valli, economists at UniCredit, said:
“We expect the Russian economy to shrink by around 12% this year (peak-to-trough of around 20%), with a muted rebound in 2023 akin to stagnation. […] If the EU stops importing oil and gas from Russia, the Russian economy could shrink by around 20% this year and fail to rebound in 2023. […] Inflation could reach 30-year highs due to rapidly rising commodity prices and supply-chain bottlenecks, prompting additional rate hikes and FX interventions.”
Meanwhile, despite downgrading Russia’s GDP outlook for this year, economists at Goldman Sachs highlighted the external sector’s ability to find new markets, which should support the ruble in the longer term:
“Taking into account the sanctions imposed and high frequency indicators to date, we downgraded our Russia growth forecast further to minus 10.0% in 2022, from minus 7.0% previously. About half of that reduction is due to the fact that shipping data suggest that Russia’s exports are more strongly disrupted than we had initially assumed, and we now expect exports to fall by 20.0% sequentially in Q2 2022 and by 10.0% for the year as a whole. […] While Russia is likely to lose its favored nation status both in the US and the EU, we think the concentration of Russia’s exports in commodities will mostly lead to trade diversion rather than destruction.”