What Is Behind Ruble’s Return to Pre-War Levels vs the Dollar? Massive Currency Controls

Editor’s note: The picture is not as rosy as you might think. The Western economic warfare is biting. Ruble has technically returned to pre-war levels vs the dollar but only select companies are able to buy it at these rates.

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Source: Tinkoff Zhurnal

Machine translated from Russian.

The ruble has been growing for several weeks. Does that mean everything will be okay? Is the currency crisis being canceled? Is it better to sell dollars as soon as possible?

The ruble has been strengthening since March 11 – then it peaked at 118 ruble per dollar, and then gradually began to decline.

The ruble overcame the psychological mark of 100 ruble per dollar after the president’s statement that Russia will sell gas for rubles. On Friday, April 1, the rate was already 83 ruble per dollar.

But in fact, the situation is like in a meme about fish that are simply shown: on the one hand, the ruble is formally strengthening, on the other hand, only companies with importer status or permission from a special government commission can buy it at such a rate.

I will tell you what affects the ruble exchange rate, why it is growing now and what to expect next.

How the ruble exchange rate is set

In the free market, the currency rate is influenced by many factors:

• dynamics of exports and imports;
• oil price and export volumes;
• the introduction or removal of customs tariffs on basic export products;
• changes in legislation;
• political statements;
• investors’ expectations.

There are several theories that explain how the exchange rate is set. Let me give you some examples.

Big Mac Index. The simplest theory is the joke Big Mac Index, which reflects purchasing power parity in different countries. This index was once invented in The Economist magazine. The bottom line is that the price of a Big Mac is taken – a standard product that consists of the same ingredients in any country.

If the same Big Mac in Russia costs about $ 1.74, and in the US – $ 5.8, then the ruble is undervalued by about 70% and the fair price is 23 rubles per dollar. But for this to work, there must be exactly the same taxes and rules for doing business. If so, the index will work well. And if not, you can’t compare the cost of a Big Mac in America and Russia.

Balance of payments parity. Another theory is balance of payments parity, which means that the exchange rate changes so that exports and imports balance each other. For many years, Russia used the Nemtsov formula, which is called so in honor of the politician Boris Nemtsov.

The bottom line is that in the 90s, the budget included the cost of oil – 3600 ruble per barrel. If you divide it by the cost of Brent crude oil, you could get a forecast of the ruble exchange rate. For a long time, this worked perfectly: if the price ran higher, you could safely sell the currency, and if it fell lower, buy.

Even the fact that there are several theories suggests that none of them is universal. Under some circumstances, one theory works well, under others, another.

What affects the ruble exchange rate now

The reason for the strengthening of the ruble was quite strong currency restrictions:

1. Individuals are prohibited from withdrawing cash currency more than $ 10,000 until September 9, 2022.
2. Individuals are prohibited from exporting more than $ 10,000 in cash from the country.
3. Individuals could transfer abroad no more than $ 5,000 and only to close relatives. Now this limit has also been increased to $ 10,000.
4. The central bank has introduced a commission for the purchase of foreign currency. At first, the commission was 30%, then the Central Bank reduced it to 12%.
5. From March 4, legal entities also have a commission for the purchase of currency – 12% of the transaction amount.
6. Since February 28, non-residents cannot sell their securities on the Moscow Exchange.
7. Since March 1, non-residents cannot transfer money from Russia abroad.

The main thing here is that foreign investors cannot get out of Russian assets – to sell shares, production or real estate. Therefore, now the ruble is completely isolated from such an important factor as the expectations and mood of investors. In addition, due to restrictions, the currency cannot actually be bought by most companies that deal with imports.

As a result, the demand for currency on the exchange market was lower than the supply of exporters, who are now obliged to sell 80% of foreign exchange earnings. This caused a strong supply distortion and the strengthening of the ruble.

Why the ruble is strengthening

The strengthening of the ruble coincided with the president’s statement that Russia would sell gas to unfriendly countries for rubles. But you need to understand that this was an emotional reaction: the new rules have not yet really worked and the cash flows have not changed in any way.

It is important that in the current conditions in Russia more currency accumulates than necessary – and the exchange rate is strengthening. At what specific moment the ruble began to grow, it is not so important – it is rather an accident.

At the same time, we are already seeing at least three ruble exchange rates. The multiplicity of exchange rates on March 30 was additionally regulated by the Central Bank.

Here are the courses:

1. The exchange rate, which with all the restrictions is set on the Mosbirzh. Approximately at this rate, currency can be bought by importers, corporate clients who have obligations in foreign currency, and companies that need currency to pay under contracts with the permission of a special government commission. The exchange rate of currency for them should deviate from the exchange by no more than 2 P. This is a logical measure to combat inflation, which is already high.

2. For all other legal entities, the Central Bank recommends setting the rate higher by at least 10 rubles.

3. There is also a currency rate on the black market, which has already begun to appear in some cities.

So the current exchange rate is more for beauty. There is no way to really buy currency at this rate – when buying in a bank, the rate will be less profitable, and you will have to pay a commission of 12% on the exchange.

A similar situation was in the USSR. There was an official undervalued rate, a black market of currency and rates of money surrogates: checks of Vneshtorgbank – the so-called birches, which paid salaries to citizens working abroad – as well as checks of the Albatross store, where they could be purchased.

What will happen to the ruble next

To predict the course in the current situation, none of the existing theories are suitable: the situation is not similar to any of the previously existing ones and is also constantly changing.

As I said, the exchange rate is influenced by many factors – and it is impossible to estimate in what proportion. Because of this, it is now impossible to accurately predict the exchange rate. It is necessary for the regulator to ease the restrictions, and the rate may drop significantly. And weakening is inevitable, because otherwise critical imports will be at risk. Many enterprises use in their work equipment or imported components that companies cannot purchase now: most do not have the status of an importer, which would allow them to buy currency at a favorable rate. Without this status, the currency will cost too much.

The second problem that the Central Bank cannot but worry about is the black market, which can develop and which will then be very difficult to eliminate along with a set of consequences, such as illegal trafficking and money laundering.

On the other hand, if there is at least a partial lifting of restrictions and de-escalation, then there will be a violent outbreak of enthusiasm among investors who will begin to buy ruble assets, and the ruble exchange rate may still grow.

In any case, in my opinion, the potential for the weakening of the ruble is now higher than the potential for strengthening.

What to do in such a situation

The most winning strategy right now is to do nothing. It is impossible to buy currency at a normal rate, and it is not known what will happen to the freedom of capital movement further.

If the restrictions on the withdrawal of currency are lifted, then it will be possible to think about how to transfer rubles into currency and protect your savings.