Russian President Vladimir Putin said this week that Russia has resisted the “economic onslaught” imposed by the West with the toughest economic sanctions. Putin deliberately used the word “Blitzkrieg,” an offensive strategy used by Nazi Germany during World War II, and to show that sanctions were not working as the West hoped, he cited the example of the rouble: Russia’s currency in the early stages of WWII 20 The invasion of Ukraine collapsed abruptly, losing more than half its value, but in recent weeks it has regained much of what was lost. Today, its value has returned to preinvasion levels.
The debate about the effectiveness of economic sanctions against Russia is quite heated even in the West, but despite some doubts (mainly related to European countries’ payments for gas and oil), it’s hard to deny that their impact on the Russian economy is devastating : According to forecasts by the Russian authorities, the country’s GDP is set to shrink by 10 percent this year, and Putin himself said citizens should expect inflation and unemployment.
Other estimates are even harsher: According to the US government, Russia’s GDP could shrink by 15 percent. Regarding the ruble, too, Putin’s example is not really realistic: according to various analyses, the ruble’s recovery in recent weeks is “artificial” and does not reflect the true value of the Russian currency.
It is mainly the work of Elvira Nabiullina, the Russian central banker. Nabiullina, a highly educated economist who was well respected even in the West before the invasion, was a key ally of Putin’s regime during those weeks of war. However, as the Wall Street Journal wrote, in the wake of the Ukraine conflict, Nabiullina denied (and destroyed) everything she had done since becoming governor of Russia’s central bank in 2013.
If until a few months ago Nabiullina was working to integrate the Russian economy into the world economy as much as possible, in recent weeks she has been resolutely committed to doing the opposite, that is, isolating and protecting it as much as possible . from western sanctions. The fact that Nabiullina agreed to help the Russian regime amazed and embittered many of her colleagues and experts, who considered her an independent figure: at the beginning of the invasion, there were rumors about the possibility that the central bank wanted to resign, but they were rejections. In fact, Nabiullina was renewed for another term.
Elvira Nabiullina in 2016 (AP Photo / Ivan Sekretarev)
Much of the work done by Nabiullina is aimed at supporting the ruble’s value as much as possible. First, it has massively raised interest rates to 20 percent: For comparison: In the European Union, interest rates are currently 0 percent, in the USA 0.5 percent.
Most notably, the Central Bank of Russia has imposed very strict “capital controls”, that is, a set of measures that effectively prevent both foreigners and Russian citizens from selling rubles abroad for other currencies. In addition, the government has asked all stateowned companies to convert much of their cash reserves and earnings into rubles since the invasion began the most notable example being the gas companies, which were recently forced to convert 100 rubles per cent of payments they received from European countries for supplies received in rubles.
The result of these measures is that transactions in rubles have practically ground to a halt: “The ruble is no longer a currency that can be freely converted,” Iikka Korhonen, an analyst at Finland’s central bank, told Politico. And in this context, almost exclusively ruble transactions that benefit from the value of the currency, such as ruble purchases by state companies, are allowed by the Russian authorities.
The rise in the ruble is therefore artificial because the Central Bank of Russia (with certain simplifications and exceptions) has frozen transactions that could have threatened the currency and only allows those that benefit it.
A Bloomberg chart showing the sharp drop in trading volume in rubles
This does not mean that the Russian central bank has saved the ruble: many analysts expect that once the capital control measures are scrapped and the ruble returns to being a freefloating currency in the market, there may be fresh collapses, although much depends on Russia Overall economic situation: “If the barriers were removed, the currency would be at a very different level,” Bloomberg wrote.
On a political level, too, it is important to the Russian regime to keep the ruble stable: Putin uses it to demonstrate, above all to neutral or proRussian countries such as China and India, that the economy is holding up despite the sanctions.
Nevertheless, the consequences are likely to be very serious: interest rate hikes usually hurt economic growth, and Russian interest rates are currently very high, so the central bank has recently reduced them slightly per cent.