The ruble has appreciated exactly BECAUSE the sanctions are working

The question I have been asked most over the last week is why the Russian ruble is been appreciating despite the fact Russia has been hit by extensive economic sanctions.

I must honestly admit that since the sanctions were introduced I have not spent much time following the development of the ruble – or rather the ruble exchange rate on our screens does not really tell us much as the ruble today cannot really be said to be a convertible currency in the traditional sense.

If, for example. showed up at an European bank with rubles and wanted to exchange them for euros then in practice you would hardly be able to do so.

This is because the Russian central bank (CBR) has been sanctioned and what happens in practice is that if you have to exchange rubles for euros the money is basically deposited in the Russian central bank, which then gives back euros – directly from the Russian foreign exchange reserve.

This can now not be done as the CBR simply does not have access to trade in e.g. euros or dollars. The foreign currency remains in the foreign exchange reserve, but the CBR just cannot use it. This is equivalent to having money in your bank account, but the online banking and credit cards do not work.

At the same time, Russia is largely shut out of the so-called SWIFT system used to conduct international currency transactions. This means e.g. that in practice you cannot transfer money between e.g. Denmark and Russia. So if e.g. If a Danish company sells a product to Russia, it will now in practice not be able to receive payment for the product.

On the contrary, Russia’s oil and gas exports, which are basically the only thing that Russia exports, are not covered by the sanctions, and Russia can continue to receive payment for e.g. gas exports to EU countries.

Slightly simplified, Russia can now not import very much, but the country can continue to export. In other words Russia’s imports have collapsed while exports are less severely affected by sanctions.

Consequently, Russia’s trade balance surplus has increased sharply in the past month.

And that is basically the reason why the ruble has appreciated in recent weeks.

Does that mean that the sanctions do not work?

If you have a mercantilist view of the world – that is if you think that it is always good to export and that imports are bad then the sanctions are great for Russia.

This view, however, corresponds to saying that it is good to work and bad to consume, but there is basically only one reason to work – namely to consume. We do not work for fun – we work to be able to consume – whether it is food or luxury goods.

Right now, Russia is now basically forced to “work”, that is, to sell oil and gas, but at the same time Russia cannot use the revenue.

At the same time, it is part of the stpry that the Russian government has severely restricted the right and opportunity of Russian citizens and businesses to own foreign currency, and citizens and businesses are forced to convert the bulk of their foreign exchange earnings into rubles. This may also to some extent also have supported the value of the ruble.

In addition, it should be noted that Russian interest rates have skyrocketed and that is basically the market compensation for the fact that the ruble has lost value – and is expected to lose additional value in the future.

Finally, the Russian foreign exchange reserve has fallen quite sharply in the past month. Thus, the weekly foreign exchange reserve data from the Russian central bank show that the foreign exchange reserve on February 25 amounted to USD 629.4 billion. By March 25, that number had dropped to USD 604.4 billion.

This is remarkable given that we know that the trade surplus has risen sharply and that Russia cannot trade Western currencies.

Do the sanctions work?

If one is to judge whether the sanctions “work” then one must relate that to what the purpose of the sanctions is.

The purpose of sanctions is not just to “punish” Russia and revenge is certainly not the main purpose. The main purpose must be to sharply reduce Putin’s ability to continue waging war.

Russia needs imports when it comes to waging war. For example Russia must use technology in military production or tires for military vehicles etc. All indications are that these imports have now been severely hampered.

At the same time Putin is dependent on economic growth both to finance the war itself (and possible future “adventures”) and to bribe those he need to support him both in the wider Russian population and among oligarchs, and more importantly in defence and the security apparatus (the so-called Silovik).

Hence, the sanctions hit the Russian economy and Putin regime very hard, but as Russian oil and gas exports are not covered by sanctions the West will be affected to a much lesser extent.

If on the other hand the EU and the West in general closed off imports of Russian oil and gas it would send oil and gas prices skyrocketing and the European economy would be hit quite hard and the European economy would most certainly end up in recession.  

A recession that could potentially threaten popular support for the hard line against Putin and which could create divisions among the EU countries.

On the contrary, Russia is already in a situation where oil and gas revenues, which are typically in euros or dollars, are not worth much, as Russia basically do not have access to spend euros and dollars.

The only thing these foreign exchange earnings today can be used for is basically to service the Russian debt in these foreign currencies. Again, it is primarily the Western investors who own the Russian government bonds that are benefiting rather than the Russian government.

So yes the ruble has appreciated in recent week, but it actually reflects that the sanctions against Russia are quite well calibrated – it maximizes the negative effects on Putin’s ability to wage war and at the same time it minimizes the negative effects on the global economy.

The “black market value” of the ruble has fallen sharply

Finally, it must be said that the ruble exchange rate that we can observe on various financial news sites is not necessarily the actual exchange rate.

In Soviet times, there was an official ruble exchange rate, but it did not have much to do with the real exchange rate. The actual exchange rate was the one you could read if you asked the black market currency traders on the streets of Moscow when exchanging physical dollars for rubles or the other way around.

In currency terms, we are now to a large extent back to the Soviet era, but today we have an easier way of observing the “black market rate” of the ruble. Hence, you can still trade bitcoin and other cryptocurrencies in Russia.

If I want my money out of Russia, then I can exchange my rubles in Russia for bitcoin, and then fly to for example Turkey and get my bitcoin paid out for dollars or Turkish lira on a Turkish crypto exchange.

Thus, by using the “local” Russian bitcoin price, we can calculate what the real value of the ruble is if one were to exchange it for dollars on the “street” in Moscow.

This “premium” which you have to pay for for example Bitcoin in Russia relative to Bitcoin elsewhere has fluctuated between 10-30 percent over the past month. It is smaller now than in the days immediately after the war started, but it is still significant.

Finally, Russian exporters of goods must also accept a discount when they export. Thus, the price of oil from Russia today is about 30 percent lower than what oil otherwise costs on the world market.

We can thus conclude that, paradoxically, it is the sanctions – because it works – that help keep the ruble exchange rate up, but the goods that Russia exports are sold at a significant discount, and at the same time the “street price” of the ruble is significantly below the “official “Exchange rate.

There is therefore no reason to be blinded by the development of the ruble exchange rate, which we can observe on various finance sites, as it does not really say much about the financial flows in and out and Russia and the state of the Russian economy.

Leave a comment


  1. Irina Kirpite

     /  April 4, 2022

    Dear Mr Christensen,

    Thank you very much for your article. This was also major question for me – how could it be that ruble appreciated so much. Therefore grateful for your explanation, I believe trade balance and reserve spending could explain a lot.

    But maybe I misunderstood what you write or there is not precise information – it is still possible to buy and sell rubles to EUR both in Russia and in Europe. European banks one by one announce that they will stop working with rubles, but so far it is possible. So, for example, exchange rate 92,15 for today is exchange rate from real deal. And compare to 89,9 that I got on February 22 this really cannot be called devaluation of ruble.

    Where is the real consequence so far is ruble interest rate. Although the rate of central bank is 20%, forward rate (but I am not sure if still possible to make in Europe) at least end of February and beginning of March was close to 100%. At the same time SWAP rate is close to 0% or even negative in some banks. Could this show the short-term expectations for rubles despite very positive development in March?

    Thank you very much if you will have a chance to shortly comment,

    Best regards, *Irina Voronova*

    Lars Christensen posted: ” The question I have been asked most over the last week is why the Russian ruble is been appreciating despite the fact Russia has been hit by extensive economic sanctions. I must honestly admit that since the sanctions were introduced I have not spent “

  2. Tim Fowler

     /  April 28, 2022

    Does trade in rubles actually go through central banks rather than just normal FOREX trading which can be between private parties?

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