Ruble under pressure: Is Putin in trouble?

In the period after the Russian invasion, the ruble was remarkably strong for a long time. However, that is clearly about to change. This is probably because the Russian economy is performing less well than official figures indicate.

Shortly after the outbreak of war in Ukraine, Western countries introduced strict sanctions against Russia. At the time, the International Monetary Fund (IMF) predicted that the economy would contract by 9%. We are now a year later and although the Russian economy is creaking, figures indicate that the damage is much less than Europe and the United States would like to see. The Russian statistics agency Rosstat calculated this week that the economy will contract by 2022% in 2,1. Usually the Kremlin pours a heavy layer of propaganda sauce on these kinds of numbers. However, many Western institutions agree with the Rosstat analysis. This raises questions about why the economy is so resilient and how it will play out in the future.

Hairline cracks in the economy
The strength of the Russian economy is due in part to the huge rise in oil and natural gas prices following the outbreak of the war. In addition, last year Russia naturally traded with countries that did not participate in the sanctions, such as China. This week it was even announced that Chinese Prime Minister Xi Jinping will visit Moscow within a few months. But despite the close ties with China, hairline cracks in Russia's economic shield have recently become visible. In particular, the sharp fall of the ruble attracts attention. Since the end of September, the currency has fallen by almost 30% against the euro.

Falling energy prices, low business inventories
The fall in the ruble is partly caused by a marked decrease in the flow of energy income. In addition to measures taken by Western countries, this is also due to a fall in international oil and natural gas prices. The Russian central bank recently revised the estimated selling price of a barrel of Ural oil for the remainder of 2023 from $70 to $55. To plug the resulting budget gap, Russia has to sell more than $100 million worth of foreign currencies every day. Another reason for the weaker ruble is that the sanctions force companies to pay more for foreign goods to replenish depleted stocks.

Pressure from the boiler
Finally, Russia has eased the strict rules that oblige companies to convert foreign currencies into rubles. That is also a signal that companies are having a hard time, as the Kremlin would prefer to keep its own currency as strong as possible. The cooperation with China can take some of the pressure off the chain for the Russian business community. Moreover, it is important not to focus too much on the pace of economic growth, but also to look at its composition. Thanks in part to a growing defense industry, the contraction in 2022 was not much greater. Like the fall in the ruble, this is an indication that much of the country is not doing as well economically as recent figures suggest. 

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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