Western sanctions squeeze the Russian ruble so much

The hard blows to the ruble are a model for the enormous pressure that international sanctions are exerting on the Russian economy. But the conflict in Ukraine is also increasingly affecting currency markets in other respects.

The ruble has fallen to less than one euro cent for the first time in history. Since inflation, the currency has lost a quarter of its value. Over the past five years, that loss has even reached 50%. The Russian central bank has taken extreme measures to stop the price decline. For example, the interest rate was raised from 9,5% to 20% and foreign parties are no longer allowed to sell shares and bonds on stock exchanges in Russia. Those measures will be of little use as long as Europe and the United States implement increasingly strict sanctions and fewer and fewer Western companies do business with the country. The ruble's free fall is a clear signal that the rest of the world is increasingly putting Russia in an economic stranglehold.

Oil companies feel the pain
The war also affects the foreign exchange market in other ways. This is partly due to a sharp rise in the oil price. A barrel of Brent oil cost more than $115 on Thursday morning. At the beginning of December, that price was below $70. This increase is caused by the harsh sanctions and because many western energy companies are withdrawing from the Russian market. In some cases it really hurts. The British BP, for example, has to accept a loss of billions on the sale of a stake in the Russian Rosneft. France's TotalEnergies is also under great political pressure to turn its back on the country in which it has invested billions. That explains why the shares of these energy companies have fallen in the past week despite the rapidly rising oil price.

Oil currencies on the rise
Oil-exporting countries are not affected by this. Countries such as Norway and Canada can expect higher oil revenues as long as Russia has a much smaller role in the global oil market. The krone has risen 3% since the outbreak of the war, and for the Canadian dollar, that gain is 2%. As the battle lasts longer and economic sanctions become increasingly strict, uncertainty in financial markets increases. This is reflected in a rise of currencies that have a status of safe harbor in uncertain times. Against the euro, the dollar, yen and Swiss franc gained 2% last week.

Is the battle spreading?
On the other hand, the prices of many Eastern European countries are under considerable pressure. The Czech koruna fell by more than 3%, the Polish zloty fell by 5% and for the Hungarian florint the damage was even more than 6%. Those declines are not an indication that currency traders fear that the battle is spreading to Eastern Europe. Countries in this region do relatively much business with Russia and are therefore indirectly hit hard by the sanctions. As the measures become increasingly strict, there is a good chance that pressure on these currencies will continue while oil currencies can gain even more ground.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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