Russian Rouble Posts Multi-Year Highs Against Dollar, Euro as More EU Countries Agree to Pay for Oil in Euro

By Jacob J
May 23, 2022 18:57 +08

How Did Putin Save the Russian Rouble?

The Russian rouble has kept rising against the US dollar and euro after it posted on Friday its strongest levels against the euro and dollar in seven and four years, respectively.

On Monday, the Russian currency strengthened further, boosted primarily by capital controls and the positive sentiment in the wake of news that more European Union nations were prepared to pay for oil in the Russian currency.

Rouble Gains 30 Percent Against Dollar This year

In early morning trade, rouble rose 2.5 percent against the dollar at 58.74. It had hit 57.0750 last Friday, the strongest level since late March 2018. Against the euro, the Russian currency gained 2.3 percent, hitting 61.38, close to, the strongest point since June 2015.

So far this year, the rouble has gained nearly 30 percent against the dollar, despite the tough Western sanctions against Russia in the wake of the Ukraine war.

The Russian rouble had sunk to an all-time low of 139 against the greenback on March 7, in the immediate aftermath of the Western sanctions.

Sanctions Fail to Curb Rouble

However, a month after the debacle, rouble had found its mooring, suggesting that the sanctions did not actually succeed in blocking significant foreign currency inflows into Russia.

EUR/USD — Euro has fallen after German factory orders Reuters

Despite the sanctions, many European countries went ahead and bought Russian gas, helping Moscow garner critical inflows of dollars and euros while battling the sanctions. This was possible because the European buyers were not able to find immediate replacement for Russian energy.

However, a series of crucial steps taken by Kremlin also played a significant part in shoring up rouble against all odds. Here's a look at some of those factors.

US Treasury's Help

Secondly, Russia was able to fend off a credit default WITHOUT selling roubles to raise the dollars needed for the settling of interest payments. This was possible because the US Treasury really did allow financial intermediaries to settle Russian interest payments.

The US had frozen foreign currency reserves held by the Russian central bank at U.S. financial institutions as part of the sanctions imposed on Moscow after the Ukraine war started. However, the Treasury Department had allowed the Russian government to use the funds to make coupon payments on dollar-denominated sovereign debt on a case-by-case basis. This helped Russia prevent an additional drain on rouble while staving off default, thereby effectively helping the currency come back to health.

Support From Asian Friends

India China discussion in Moscow Russia's Foreign Minister Sergei Lavrov, India's Foreign Minister Subrahmanyam Jaishankar and China's State Councillor Wang Yi pose for a picture during a meeting in Moscow, Russia September 10, 2020. Russian Foreign Ministry/Handout via REUTERS

Thirdly, Russia's Asian friends espoused a remarkably different approach to the European crisis that started with Russia's invasion of Ukraine. While the United States and Western Europe adopted an extremely hostile stance against Moscow, the treatment in other world capitals like New Delhi and Beijing was quite different. The Asian allies made sure the West would not succeed in the game of arm-twisting. India and China pressed ahead with the purchase of the Russian oil, now cheaper for that matter.

Remarkably, India fended off naive yet feeble US threats about sanctions by affirming its position that it will not kill the S-400 missile defense purchase from Russia. Weeks into the war and intermittent threats on sanctions, now the US has all but acknowledged that India's purchase of S-400 would not be impacted by the sanctions. Such resolute support from key allies punched holes in the West's plot line of an imminent Russian collapse.

Raising Interest Rates

In the aftermath of the war and the sanctions, Russian President Vladimir Putin moved swiftly to tie up the lose ends at home. As the sanctions began to bite and the rouble started experiencing the pressure, Russian Central Bank of Russia raised interest rates to 20 percent. This shored up the battling currency's health immediately, as Russians found an incentive in saving up their roubles, thereby preventing a flight that would have made matters quickly worse.

The Russian Central Bank The Russian Central Bank Reuters

Putin Ordered Russian Companies to 80% Foreign Earnings into Roubles

Another master stroke by Putin was the order that bound Russian companies to convert up to 80 percent of their earnings abroad into roubles. This meant that each time Russian companies received payments in dollars or euros abroad, a vast chunk of this was swapped into roubles, the NPR reported.

Ban on Money Transfer Abroad

Another key move that shored up the rouble was the ban on Russians transferring money abroad.By suspending all foreign exchange loans and transfers in the immediate aftermath of the war, Moscow prevented an additional pressure on the currency.