Energy-Driven Ruble Rebound Won’t Rescue Russia

On Monday, President Vladimir Putin claimed that Western sanctions imposed against Russia have failed in a televised address. He said the strategy of economic blitzkrieg did not provoke an immediate meltdown of the economy as expected. Instead, he touted the strength of the ruble, Russia’s currency.

Shortly after Russia invaded Ukraine, the West imposed unprecedented sanctions on the country— primarily targeting its Central Bank reserves including its sovereign wealth fund. The ruble plummeted immediately, dropping in value more than 40%, leading many experts to predict the currency was in freefall. However, it returned close to its pre-war exchange rate against the American dollar after a month of war. But while the ruble did defy expectations due to Russia’s currency manipulation, its recovery is a red herring.

Energy sales partly explain the dramatic rebound. Moscow receives 40% of its budget revenues from energy exports. Energy sales that bring an influx of foreign currency are a lifeline for Russia, which now lacks access to global capital markets.

Russia is projected to earn $321 billion from hydrocarbon exports in 2022— more than a 30% increase compared to last year. This sizeable jump is despite sanctions imposed on the country’s energy sector and a steady stream of companies leaving on their own accord. President Joe Biden declared a complete ban on Russian oil and gas imports to the U.S., while Prime Minister Boris Johnson announced plans to stop oil imports by the year’s end.

However, Russia still has enough buyers to keep its energy industry afloat and bolster its balance of payments. India has taken advantage of falling prices for Russia’s Ural crude oil—buying it at a significant discount. China continues to respect lucrative oil contracts signed before the invasion, although sanctions keep state-owned companies like Sinopec and PetroChina away from new purchases.

The EU, which is reducing its reliance on Russian imports, it is still making large payments to the Kremlin because member states like Germany and Italy still heavily depend on its natural gas. The 27-member bloc has paid €35 billion to Russia for energy imports since the start of the war.

While increased energy revenue can partially explain the rebound, the currency is also being artificially bolstered. Immediately following the invasion, the Central Bank doubled its key interest rate, imposed widespread capital controls, increased currency-trading restrictions, and forced exporters to convert their foreign currency revenues into rubles. The ruble ceased being a convertible currency.

For nearly a month, officials shut down Russia’s main stock exchange after highly volatile trading on the second day of the invasion. The exchange reopened now, but with strict trading limits.

In a speech that clashed with Putin’s televised address, Russia’s own Central Bank chief, Elvira Nabiullina, warned that the consequences of sanctions were only at a start. The worst is ahead. The former Russian finance minister, Alexey Kudrin, agreed, predicting that the Russian economy set for largest contraction since 1994.

Soaring inflation, expected to hit as high as 23 % this year, threatens to devour the earnings of ordinary citizens. International financial organizations estimate the country’s gross domestic product could plummet by as much as 15% this year— erasing decades of growth. Before the invasion, Russia was expected to grow by 3 % in 2022. Even a more “conservative” decline of 10% would make it Russia’s worst recession since the nineties.

The economic chaos after the collapse of the Soviet Union set the stage for Putin’s meteoric rise in 2000. Since then, he justified his strongman rule first by providing sustained growth until 2008, then through the dire warnings that Russia would return to the crises of the nineties without his iron fist. However, how Russians will react to those hardships when the worst comes remains uncertain. For now, Putin’s popular support is allegedly high, and his war machine, although sputtering, perseveres.

This week, the Russian military launched its long-anticipated offensive in the Eastern part of Ukraine, including the Donbas. Pressure is mounting for the Russian military to deliver results by May 9, the country’s annual Victory Day, a holiday that celebrates the defeat of Nazi Germany and the end of World War II. For Putin taking control of the Donbas, which the Kremlin claims is the primary objective of its invasion, could supply him with a propaganda victory for his shambolic military campaign. Yet it would still be a strategic defeat for Russia’s declared war goals of regime change in Ukraine and pushing for a major retreat for NATO.

Putin is wrong to tout the ruble’s recovery as a sign of Russia’s resilience and strength. This is smoke and mirrors. The West should remember that broad and comprehensive sanctions, including on the energy sector, is the long knife of economic statecraft, and should be used until the war is won.

With assistance from Ines Lepeu and Sarah Shinton