Ruble Tops Global Currencies as Putin Reaps Iran War Oil Gain

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(Bloomberg) — Russia’s ruble has muscled its way to become the world’s best performer against the dollar so far this quarter, buoyed by a surge in foreign currency receipts from oil sales following the outbreak of war in the Middle East.

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The ruble has advanced roughly 12% since the start of April to 72.6 per dollar, the strongest level since February 2023, according to data compiled by Bloomberg. For a second straight year, the currency is diverging from official and market forecasts that projected a depreciation, leading some analysts to view it as overvalued relative to the current economic conditions. 

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The ruble’s strength is increasingly looking like an embedded feature of Russia’s current economy, a product of both sanctions-driven imbalances in its financial market and tight monetary policy to offset massive government spending on President Vladimir Putin’s war in Ukraine. While the appreciating currency helps ease inflationary pressure, it’s also squeezing exporters’ earnings and budget revenue.

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“If the Russian economy eventually moves away from a wartime footing, the ruble will also return to more normal levels,” said Iskander Lutsko, a Dubai-based senior portfolio manager at Istar Capital. “Right now, conditions are ideal for further strengthening.”

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Economy Minister Maxim Reshetnikov said last month that the ruble may remain stronger “than many would like” in the coming years under the current economic model, which has limited capital outflows.

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Demand for foreign currency remains subdued amid high local interest rates and weak imports, nearly 60% of which are now paid for in rubles as Russia has continued to adapt to sanctions imposed after the February 2022 full-scale invasion of Ukraine.

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At the same time, inflows of foreign tender — which had begun to fade after Washington tightened sanctions on Russian oil last year — have surged following a rally in energy prices and an easing of US restrictions in response to disrupted shipping through the Strait of Hormuz.

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Net foreign-currency sales by Russia’s largest exporters tripled in April to $7.3 billion after the average price of Urals crude rose to $77 a barrel in March from $44.6 a month earlier, according to central bank data. Urals averaged $94.9 a barrel in April, contributing to additional hard-currency income this month, the Bank of Russia said.

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Under Russia’s fiscal rule, oil revenue generated above a $59-a-barrel threshold is used to buy foreign currency for the National Wellbeing Fund, which is tapped to support the budget when crude prices fall. The mechanism typically helps smooth ruble volatility caused by swings in commodity markets, but current purchases are insufficient to offset the surge in foreign currency.

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In May, Russia resumed purchases of foreign currency and gold for the fund for the first time since June last year, allocating 110 billion rubles ($1.5 billion), though the amount is dwarfed by exporters’ foreign-currency sales.