Why the Russian ruble recovered all its losses and more post-invasion — and despite sanctions

Russia’s invasion of Ukraine on Feb 24 sent shock waves throughout the world, not least of which the former’s economy, as wide-ranging sanctions were very quickly imposed by nations led by the US and the West. The fact that the Russian ruble collapsed came as no surprise to anyone. What is very surprising, however, was how fast and how steeply it has since recovered — indeed, even strengthening beyond pre-invasion levels. What happened?

Clearly, part of this has to do with the Russians effectively managing the supply of and demand for the ruble. On the supply side, its central bank implemented an array of capital control measures, including requiring that exporters convert at least 80% of their foreign earnings into the local currency, prohibiting the sale of securities (bonds and stocks) held by foreigners, raising interest rates sharply (from 9.5% to 20%) to encourage savings in rubles and limiting the amount of foreign currencies that can be withdrawn/remitted abroad.

Broad sanctions helped, by cutting off imports and severely curtailing demand for foreign currencies. Meanwhile, Russia continued to export oil and gas. As a result, its trade surplus ballooned, which as in any normal circumstances would strengthen the local currency. The ruble recovered almost all of its post-invasion losses within the month.

What is less known, owing to the blackout of Russian news by Western media, is the decision by Russia to peg the ruble to gold, in late March — at 5,000 rubles per gram. This effectively provided a floor for the currency, equivalent to roughly 81 rubles per US dollar at the then prevailing prices.

Last but not least, President Vladimir Putin proposed that natural gas would be sold in rubles instead of the US dollar and euro, a decision he signed into law on March 31. Whether the payments in ruble were made directly or indirectly, they provided an additional boost to demand that sent the currency soaring above pre-invasion levels (though we note that Russian companies were already required to convert 80% of their foreign earnings to rubles under the earlier capital control measures).

The central bank was able to cut interest rates from 20% to 17% by early April, and further to 14% currently.

In short, Russia has successfully engineered a remarkable recovery for the ruble — defying all the sanctions that remain in place. Indeed, the list of sanctions is still expanding. To be sure, prevailing exchange rates may or may not reflect a sustainable value, given that the ruble is not freely traded in international markets. But the most important takeaway is this: Pegging the US dollar to gold under the Bretton Woods system was the genesis for the US dollar hegemony, and its position was cemented by petrodollars. We are not saying the same pegging of the ruble to gold and “gasruble” will see it displace the US dollar as the world’s reserve currency. But they are major divergences from international monetary economics that the world has accepted as the norm for decades. And we bet more alternatives — and more realistic challengers — to the US dollar will emerge over the coming years.