Russian Ruble Recovers To Pre-Ukraine War Levels, Inflation Soars

Credit: Wikimedia Commons / Petar Milosevic

The Russian ruble not only recovered to pre-Ukraine war levels but also hit a two-year high against the US dollar on Friday, April 29th.

The currency has gained ground and is now among the best-performing currencies in the world after Russia said it managed to pay back Eurobonds with US dollars, as the country tries to avoid a default.

The rebounding ruble has allowed the Central Bank of Russia (CBR) to cut key interest rates to 14 percent per annum from 17 percent, following an earlier cut from 20 percent on April 8th.

“Today’s decision of the Bank of Russia along with current preferential lending programs of the Government will support the availability of credit resources in the economy and limit the scale of decline in economic activity,” CBR explained in a statement.

However, the disinflationary impact of monetary policy will remain in place, it was warned. Given the monetary policy stance, annual inflation is expected to reach 18 to 23 percent in 2022, slowing down to 5 to 7 percent in 2023 and returning to 4 percent in 2024.

According to CBR’s baseline forecast, Russia’s GDP is expected to drop by between 8 to 10 percent in 2022, mainly driven by supply-side factors.

Ruble recovers thanks to artificial demand

After Russia invaded Ukraine in late February, the CBR had raised interest rates to 20 percent from 9.5 percent in an emergency effort to aid the plunging ruble by preventing Russian brokers from selling securities held by foreigners. Stringent capital controls were also established.

The Russian currency had briefly crashed about 10 percent to a record low of 90 against the US dollar on the first day of the invasion of Ukraine on February 24th.

Thereafter, its value continued to fall to extremely low levels impacted by the international penalties leveled at Russia in response to the war in Ukraine.

It hit its lowest value on March 7th.

However, Russia has since been able to prop up the ruble by manufacturing artificial demand for its currency even amidst a failing economy.

At the end of March, Russia demanded that all payments for gas and oil deliveries by “unfriendly” countries be made in rubles.

Last week, a source close to Russian gas giant Gazprom claimed that four European countries had already paid for gas in rubles while, at the same time, the company completely severed gas supplies to both Bulgaria and Poland.

According to Reuters, Poland’s climate minister has called on the European Union to penalize countries that use rubles to pay for Russian gas.

Ruble’s rebound affecting the Euro

Analysts explain that the acceptance of payments in rubles will strengthen the Russian currency further, making energy more expensive for Europeans and their economy which is yet to recover from the pandemic.

While the ruble recovers, the euro is already weaker against the US dollar than it was in either 2017 and 2019.

In the meantime, Greece is racing to reduce its dependency on Russian energy imports by diversifying its resources.

As Greece imported 33 percent of its gas supplies from Russia in January, Athens called on the EU to support member-states and businesses against a further rise in energy costs.

In March, PM Mitsotakis assured Parliament that his government is prepared for a “worst-case scenario where gas supplies from Russia are halted,” as its liquefied natural gas (LNG) storage facility at Revythousa has been recently replenished.

In January, Greece covered 47 percent of domestic demand with LNG from Revythousa and 20 percent through the TAP pipeline.

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