This is the real reason of the ruble rally

Who would have thought: in March, the Russian ruble was the biggest gainer in the currency world. However, the trading volume in the currency is extremely low, making it easy to manipulate the price. The current exchange rate therefore does not reflect the true value of the currency.

The Russian ruble has fallen almost 40% against the euro in the two weeks after the invasion of Ukraine. That is hardly a surprise, given that trade with Russia has fallen sharply as a result of all kinds of sanctions. Since March 10, however, the currency has rebounded rapidly to pre-war levels. Do all trade measures hurt less than you might think? Part of the price recovery is undoubtedly due to the fact that the sanctions package is not watertight. For example, a lot of Russian natural gas still flows towards the eurozone. In addition, major economies such as China and India have not joined the Western measures. Moreover, energy prices have risen sharply since the beginning of the war.

Frozen reserves
All in all, this ensures that a considerable amount of foreign currencies flows towards Russia. The country also desperately needs that influx, as currency reserves at banks in Europe and the United States have been frozen. As a result, Russia is unable to access half of the nearly $600 billion in foreign currencies held in foreign banks. Incidentally, the US Treasury Department does allow the country to gain access to international payment systems for interest payments and repayments of the national debt. This flight route will be closed later this month. Then it will be a big challenge for Russia to meet the financial obligations of the national debt. 

Top interest as a lure
At home, Russia has done everything possible to keep the ruble afloat. The interest rate has more than doubled to 20%. That high interest rate is a lure for Russians who are hesitating about converting their money into euros, dollars or other hard currencies. All kinds of new rules have been introduced for companies. Of the money that Russian enterprises earn abroad, 80% must be immediately converted into rubles. And brokers are prohibited from selling securities owned by foreign parties. Moreover, President Vladimir Putin alludes to the fact that customers will soon have to pay for natural gas in rubles.

Don't be fooled
The package of Russian measures has artificially fueled the demand for rubles. Since there was hardly any supply of rubles and Russia itself hardly needed foreign currency, the measures were enough to boost the currency to its current level. But don't be fooled: the current rate does not reflect the true value of the currency. If Western countries introduce new sanctions – for example by no longer purchasing natural gas or by excluding Russia from international payment transactions for interest payments and debt repayments – the house of cards may collapse.

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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