The US dollar exchange rate exceeded RUB93 on July 6, setting a new record high for more than a year, while the euro rose above RUB100 on Moscow Exchange.

As followed closely by bne IntelliNews, following President Vladimir Putin’s decision to launch a full-scale invasion of Ukraine, the Russian ruble has been stronger than it was prior to the war. This trend has been rapidly reversed in spring 2023 as the ruble found itself in decline.

The exchange rate is closely watched by ordinary Russians, SMEs and industrial majors, who need a stronger ruble to help them cut costs and boost investment.

Apart from the general economic uncertainty due to the fallout from Russia’s full-scale military invasion of Ukraine, weak external demand along with "the weak ruble and the rise in prices of imported equipment and raw materials" were named as the biggest constraint on industrial growth in recent surveys.

Wagner mutiny first to blame

Bloomberg linked the capital outflow that spiked due to the short-lived military mutiny and the coup attempt by the private military company Wagner. Russian households and businesses are still seeking safety by shifting money outside the country, Bloomberg reminds, estimating that the stock of retail deposits held abroad increased by $43.5bn from early 2022 until May 2023.

“Perhaps this [Wagner mutiny] became a trigger for the weakening of the ruble, in combination with growing imports, weak exports, demand for foreign currency for payments to non-residents and an extremely low level of liquidity,” said Natalia Lavrova, chief economist at BCS Financial Group, as cited by Bloomberg.

The political crisis “certainly increased the attractiveness of the dollar, causing an additional outflow of funds into foreign currency, foreign banks – both by households and companies,” Lavrova added. 

“The ruble has lost the support it enjoyed last year from high energy prices and a double-digit domestic policy rate. A distinctly accommodative monetary policy provides little incentive to save in the domestic currency, while Wagner’s mutiny is likely driving local investors to update their estimates of local risks,” Bloomberg Russia economist argued.

Fundamentals and external balance 

The analysts surveyed by The Bell believe that the worsening balance of payments, capital flight and the latest restrictions on crude oil exports are exerting pressure on the ruble. Renaissance Capital's chief economist for Russia and CIS, Sofia Donets, told Forbes that the final effect on the Russian currency will depend on the reaction of oil prices.

BCS Global Markets analysts believe that the ruble is still under pressure from the worsening balance of payments due to the reduction in export revenues, with another negative factor being high budget expenditures. 

"For a more sustainable and sustained rebound in the exchange rate of the national currency from multi-month lows, there is still no sign of a significant improvement in the key drivers of its weakening," BCS GM analysts warn as cited by The Bell.

At the same time, the analysts at PromSvyazBank (PSB) link the weakening of the ruble to rising demand for currency among major players. 

"Technically, there are risks that the [US] dollar may well rise to RUB92, including due to the activation of speculators in the market, but we emphasise that the growth will be local in nature," the PSB report said as cited by The Bell.

PSB estimates the fair value of the US dollar to ruble on Moscow Exchange at RUB86-RUB88, and expects the quotes to go back to this level as the market frenzy calms down.

Officials stand by free-floated ruble

Most recently, the first deputy chairman of the Central Bank of Russia (CBR) Xenia Yudaeva said the weakening ruble poses no risks to the Russian financial system. The exchange rate, in her view, was influenced primarily by "a significant reduction in the current trade balance". The regulator also sees no reason to return to the obligation to sell proceeds by major exporters, Yudaeva argued as cited by The Bell.

The CEO of Russia’s largest state-controlled lender Sberbank and ex-FinMin German Gref has ruled out the possibility that the ruble exchange rate would sink to the extreme low levels it was at shortly after Russia launched full-scale military invasion of Ukraine (in March 2022, the US dollar exceeded RUB120 and euro RUB127, Vedomosti daily wrote.

Nothing out of the ordinary is happening today, Gref added, and reminded that a freefloated ruble is a predictable, understandable policy of the CBR and the government. He reiterated Sberbank’s guidance for ruble exchange rate of RUB75-RUB78 to US dollar by the end of 2023.

Governor of the CBR Elvira Nabiullina also reminded that freefloated exhange rate was a benefit for the economy, allowing it to adapt to external shocks. To remind, the 2016 European central banker of the year is credited with steering Russia through the 2014-2015 recession by free-floating the ruble and targeting inflation, which was reined in to its lowest level in post-Soviet history during her tenure. 

"The floating exchange rate, yes, it changes under the influence of foreign trade, we have tools to smooth out short-term fluctuations. But a floating exchange rate, in our view, is a benefit that allows external changes, external shocks to be absorbed more easily in the economy," Nabiullina commented on the latest ruble weakening as cited by Vedomosti.

She noted that when the exchange rate weakens, various conspiracy theories begin to emerge. "As if the weakening was purposeful [in order] to increase budget revenues, or some other theories. But first of all we should look at the dynamics of foreign trade. It largely determines the movement of the exchange rate. For example, a massive strengthening of exchange rates last year was perceived by many as a victory over the circumstances. But we have to honestly admit that this was caused by a sharp increase in exports and reduction of imports," the CBR head argued.

Nabiullina stressed that the floating exchange rate can indeed be volatile amid shocks, but it is important that it should not be detached from its fundamentals. "Attempts to artificially maintain this exchange rate end, and we know from our history, with periods of deep devaluation," she reminded.

The Central Bank will take into account the risks and the dynamics of the exchange rate, which now carries pro-inflationary risks, when deciding on the key rate, Nabiullina added. She added that international experience shows that low-predictable inflation itself reduces exchange rate fluctuations.

Bloomberg’s Isakov reminded that the FinMin and the CBR have an array of tools to stabilise the exchange rate, including imposing restrictions on financial account transactions (and withdrawal of funds abroad), selling currency in excess of the budget rule from the CBR’s Chinese yuan reserves, raising the key rate above market expectations, reducing budget spending and other measures to cool domestic demand for imports. 

"The problem is that many of these 'cures' for weakening are worse than weakening itself," Isakov warned.