Ruble’s world-beating rally poses new risk to Russian economy

Synopsis

Against all odds, the Russian ruble has risen impressively against the dollar, leaving officials astonished. This unexpected improvement is playing a crucial role in the wartime economy, showcasing the impact of reduced foreign currency demand and a stringent monetary policy.

Russia's ruble has outpaced every major currency against the dollar this year, a rally that caught policymakers off guard and threatens to undermine the nation's wartime economy.

The ruble has strengthened 45% since the start of the year and is trading near 78 per dollar, within touching distance of levels seen before Russia's full-scale invasion of Ukraine nearly four years ago. Over the past 12 months, the appreciation has been the strongest since at least 1994, the data show.

A key driver has been a sharp drop in demand for foreign currency in Russia amid international sanctions, while exceptionally tight monetary policy has boosted the appeal of ruble assets for residents. The central bank's key rate stayed at a record-high level from October last year until June, before policymakers cut by a cumulative 5 percentage points to 16%.

The government had forecast an average exchange rate of 91.2 per dollar for this year. The resilience has persisted despite weaker oil prices and fresh US and European sanctions, amplifying the drag on state finances by squeezing exporters' revenues when converted into rubles.

Support for the currency has also come from the Bank of Russia's foreign-exchange sales, mirroring the Finance Ministry's operations as it disposes of yuan and gold from the National Wellbeing Fund to replace lost energy revenues. Oil and gas budget proceeds plunged 22% in the first 11 months of the year, finance ministry data show.

The ruble's advance this year places it among the five best-performing global assets by spot return after platinum, silver, palladium and gold, according to data compiled by Bloomberg.

For the central bank, a stronger ruble is welcome in the fight against inflation, and Governor Elvira Nabiullina has signaled that the disinflationary effect hasn't yet been exhausted.

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