Money and Markets

Russia's rouble has bounced back to pre-invasion levels but the economy is still in a dire state

Business Insider US
Russia hiked interest rates to encourage people to keep their money in the bank. MICHAL CIZEK/AFP via Getty Images
Russia hiked interest rates to encourage people to keep their money in the bank. MICHAL CIZEK/AFP via Getty Images
  • Russia's rouble has rebounded to where it stood before Vladimir Putin invaded Ukraine, despite the economy remaining in a dire state.
  • The recovery is due to strict rules put in place by the government that have limited the selling of the rouble.
  • Economists have said sanctions are still taking a heavy toll on Russia's economy, which is expected to shrink dramatically.
  • For more stories visit www.BusinessInsider.co.za

    Russia's currency, the rouble, has bounced back to where it was before President Vladimir Putin ordered his troops into Ukraine.

    Analysts have said it's not a reflection of the strength of the economy, but rather more of the strict controls the government has put on the financial system and tough rules on exporters.

    "This is not a free market anymore," Lee Hardman, currency analyst at Japanese bank MUFG, told Insider.

    The currency plunged to a record low of around 140 to the dollar shortly after the country invaded Ukraine in late February. Investors dumped the rouble as Western governments imposed harsh sanctions that cut Russia off from the bulk of its foreign currency reserves.

    But it has since risen to above where it was just before the invasion began, trading at around 79 to the dollar on Friday.

    Here's what's going on.

    Why has Russia's currency risen?

    A key weapon in the government's financial armory has been capital controls, rules that limit how much money is allowed to move in and out of the country.

    The government has imposed strict limits on how much people can take out of Russia, limiting the selling of the rouble. For example, Russians have been banned from extracting more than $10,000 (R147,000) of foreign currency, or moving cash to foreign accounts. On top of this, foreign investors have not been allowed to sell domestic financial assets.

    Russia has also ordered exporters who earn foreign currency to convert 80% of any money earned abroad into roubles. This has been a key support for the currency, given the fact that Russia is still earning plenty of money from oil and gas exports.

    The central bank has also been active, doubling interest rates to 20% after the rouble started tumbling in late February, before cutting them to 17% Friday. That's encouraged Russians to keep their roubles in their in banks.

    Are the sanctions still working?

    The recovery in the rouble is somewhat embarrassing for US President Joe Biden, who called it the "rubble" after it plunged in March. But the draconian government restrictions mean the level of the currency is not a reliable economic signal.

    "Guys, with capital controls, I can fix the currency at about any rate I want to," economist Daniela Gabor tweeted on Wednesday.

    Forecasters expect 2022 to be a dire year for Russia, as sanctions trigger a plunge in imports and investment.

    The Institute of International Finance expects Russia's gross domestic product — the most common measure of the size of an economy — to shrink 15% this year, wiping out 15 years of growth.

    Capital Economics, a consultancy, expects GDP to contract 12% and unemployment to almost double from 4.1% to 8%. Goldman Sachs thinks sanctions and "self-sanctioning" by western companies will cause imports to tumble 20% this year and exports to fall 10%.

    Hardman said: "Those kind of economic conditions would justify a weaker currency, but obviously the government has put in place capital controls to prevent that from happening.

    Get the best of our site emailed to you every weekday.


    Go to the Business Insider front page for more stories.