By Tommy Wilkes

LONDON, (Reuters) – The rouble has seen a rapid recovery from levels reached days ago before Russia invaded Ukraine. It defies all predictions that it would plunge into freefall.

Partly, the dramatic rebound in currency value – nearly half of it fell in just seven trading sessions immediately following the February 24, invasion is due to real improvement in Russian financial finances. As energy export revenue grows and imports decrease, this can be partly attributed.

However, it would not be accurate to use this as proof that Russia’s sanction-savaged economy has gone out of business.

Capital controls are also artificially inflating the currency. With Russia’s GDP expected to fall 10%-15% next year, Russians are rapidly becoming less wealthy as rising inflation consumes their income.

Ulrich Leuchtmann (DE:) an analyst with Commerzbank, stated that “This (rouble recovery), shouldn’t be taken as the market’s opinion on the medium- to long-term outlook Russia,”

“Market forces can’t drive the rouble the way that they can euro or dollar,” said he, adding that, while Russian demand for currency was decreasing, the currency-bettors who use it to predict a country are now absent.

The rouble split since the start of the war into two markets: an onshore one for local institutions and an offshore market for Western investors and banks to trade with other entities and those not under sanctions. Both have seen a decrease in trading volumes.

JPMorgan (NYSE 🙂 stated this week that Western banks have reduced trading and credit lines for Russian entities. This has created “a friction between onshore and offshore trading”.

The gap in prices between the markets has decreased as the rouble recovered.

Refinitiv data indicates that this week’s offshore rouble traded at 75 cents per dollar. This is the same price it was in the days leading up to the Russian invasion.

The record low was 150 for a dollar on March 7.

Onshore markets saw the rouble briefly reach 80.33 dollars on Friday, the highest level since February 23rd, well above its March 10th low of 121.5.

Graphic: Russian rouble vs U.S. dollar – https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnmwjavq/rouble%20vs%20dollar.PNG

‘PROPPED UP…’

On Thursday, the White House stated that Moscow had artificially “purged” the ruble. It is not difficult to determine the impact of the official recovery measures.

Russia responded to these sweeping sanctions by raising interest rates to 20% and limiting access to foreign currencies cash to local businesses. It also barred residents from withdrawing more that $10,000 in foreign currency over six months. Banks were prohibited from cash-selling hard currency.

Exiting foreign investors has been prohibited, which limits the rush to dump roubles. President Vladimir Putin demanded on Thursday that foreign buyers start paying in Russian gas in roubles starting April 1.

Minna Kuusisto, chief analyst at Danske Bank, stated that “European nations aren’t willing to do it because it would have positive impact on the currency market if it succeeds and European countries agree,”

Analysts view Putin’s demand to lower sanctions and strengthen the currency. Kuusisto pointed out that Russian gas vendors in the past have not converted foreign exchange income fully into roubles.

…BUT TRADE DRIVEN GAINS ARE ALSO

However, part of the rouble recovery’s success is genuine. As long as the balance in payment is improving, currencies can be strong even if the economy is reeling.

According to the Institute of International Finance, Russia’s March oil import earnings are estimated at $12.3 billion. The estimate is up from March 2021 because of rising fuel prices.

According to IIF, a collapsing inflow could cause the current account surplus to double between 2021 and $200-$240billion this year.

Robin Brooks, chief economist at IIF, acknowledged that questions regarding the rouble movement were valid given capital controls. However, he called the recovery “genuine”, pointing out Kazakhstan, a fellow oil exporter, and which has now recouped almost half of its losses after the invasion.

The rouble’s long-term fortunes are less favorable.

Russia will be less competitive in the West’s Ostracism, which could lead to fewer foreign buyers. If oil prices drop, Russia may also struggle. Russia is less able to defend its currency with half of its $640 million worth foreign reserves and gold frozen.