Why is the Russian Ruble booming, and could it be worth shorting ?

A friend sent me a message regarding a rather interesting investment opportunity the other day, which got me thinking:

You know, it’s a funny one. Russia invade Ukraine and the world into levels economic sanctions thick and fast. All hell breaks loose and the Ruble, understandably, plummets. There was even an economist on live TV toasting the end of the stock market:

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Dear stock market, you were close to us, you were interesting, rest in peace dear comrade

Alexander Butmanov, Russian economist

It certainly seemed like the world was closing in on Russia’s native currency. But then, it rebounded. Why?

The Rebound

The Ruble was down 40% at one point, trading at 139 Rubles per USD on March 7^th. Three weeks later, it was back to 85 Rubles per dollar, while it has since strengthened even more, currently trading at 80 Rubles per dollar.  That means that, at time of writing, it is trading at the same level as when Russia first invaded Ukraine on February 24^th. For March, it was the top performing currency in the world.

The economic sanctions imposed on Russia were meant to attack the Ruble, by making it impossible for Putin to get his hands on foreign currencies such as euro and dollars. But there is a loophole which other countries have been unable (unwilling?) to close and, like most geopolitical issues, it comes down to energy. Economies around the globe, especially within Europe, have become so dependent on natural gas from Russia that they have continued to purchase it, which, when coupled with the skyrocketing gas prices, has helped to rally the Ruble.

Secondly, China and India have not really levelled sanctions of their own, so continued trading with those two countries has helped provide a cushion for the Ruble.

But even bigger is the US showing mercy on the debt repayments. If Russia were unable to make interest payments on their debt, they would have defaulted – and they very nearly did. But with the US Treasury allowing financial intermediaries to process payments from Russia, they have been able to avoid selling Rubles to raise dollars for the interest payments, which would have cratered the Ruble value.

Manipulation

Putin has made it top priority to protect the native currency, too. 80% of money made abroad by Russian businesses is required to be swapped into Rubles – and that is regardless of what exchange rate is available. This obviously creates a lot of (manipulated) demand for Rubles. Similarly, a law out of Moscow forbade Russian brokers from selling securities owned by foreign investors, in order to prop up the stock and bond markets, and by proxy the Ruble.

Then there is also the fact that the Russian Central Bank raised rates to 20% on the same day of the invasion on February 24^th – a tool designed to encourage Russians to save in Rubles rather than jump ship.  

So, yeah – it’s not exactly a free market.

Going Forward

But is my friend right – would it still be a good bet to short? They are still at war, right – a currency at least should depreciate a little?

I don’t think so.

I believe this manipulation, and Putin’s determination, is too prohibitive here. The most impactful of all is Putin’s attempt to force “unfriendly countries”, including all states within the European Union, to pay for gas in rubles. The world needs a lot of energy – if this does transpire, the wave of demand for rubles will be more like a tsunami. Indeed, it is this anticipation of a potential surge that has driven the Ruble’s rebound more than any other factor.

I think the reliance on Russian gas is too large, and Europe don’t quite have the conviction to pull the trigger and layer the one sanction that really matters on Russia. Germany are likely the ones with the most power to make the call, but they probably won’t want to stomach the damage to their own economy that a gas embargo from Russia would cause. The EU currently get 10% of their oil and over a third of their gas from Russia. It’s a hell of a task to cut that out overnight, as the implications for Europe would be enormous.

On the other hand, EU has stated previously that it plans to cut out all Russian fossil fuel imports by 2027, which includes a reduction of two thirds this year. Of course, this is easier said than done, and Putin will no doubt put up a fight. Elsewhere, the Russian Central Bank won’t be able to sustain 20% rates, as credit for borrowers will need to be restored eventually.

But while the EU continue to buy Russian gas, and Putin remains pulling the puppet strings on the valuation, I don’t believe there is any reason for the Ruble to fall.

It’s a difficult currency to short; I’m not wading into this one.