The ruble is rising sharply as Russia considers looser capital controls

The ruble is rising sharply as Russia considers looser capital controls


The ruble’s recovery has made it more than 30 percent stronger against the dollar than it did before the Russian invasion of Ukraine.

The ruble’s sharp recovery on Monday accelerated and increased pressure on Russia to loosen key capital flow control, which is the basis for the currency’s recovery.

With profits now threatening budget revenues and exporters, a decision to reduce the share of hard currency revenues that exporters convert to rubles could come as early as this week, according to two people familiar with the matter. The required share could be reduced to 50% from the current 80%, said people who demanded anonymity because the details of the plan are not public.

The ruble’s recovery left it more than 30% stronger against the dollar than it had before the Russian invasion of Ukraine on February 24. Authorities are gradually easing tight limits on foreign exchange operations imposed in the days following the invasion to halt the sharp decline in the currency.

Restrictions, combined with a collapse in imports amid large-scale sanctions imposed on Russia and its allies, have almost eradicated demand for foreign currency, just as supply has risen due to high prices for largely unauthorized energy exports.

Russia's currency has risen sharply in recent weeks

The Ministry of Economy said late Monday evening that the appreciation of the ruble is peaking and capital flows and imports will adjust, thus reducing the pressure on the exchange rate, Tass said.

A complete “abolition of capital controls would return the ruble to the 70-80 range against the dollar, which would be much more convenient for the economy,” said Tatiana Orlova of Oxford Economics. “This level of exchange rate is already included in the prices. Therefore, a return to this range would not support inflation. “

The latest onslaught of ruble power seems to be supported by European companies, which have complied with President Vladimir Putin’s demand to switch to paying for natural gas in Russian currency.

In just four trading sessions, the ruble jumped 13% against the euro and climbed 6.2% to 59.15 on Monday alone. The Russian currency strengthened against the dollar by 5.2% to 57.2700, which is its strongest closing since April 2018.

Sanctions on the central bank’s reserves mean that it cannot make foreign exchange purchases, which it regularly made before the invasion. The Tass intelligence service first announced plans to reduce the requirement for mandatory sales by exporters.

“The ruble is run solely by trade and we are probably sitting on top of a current account surplus,” Tatmer Ghose of Commerzbank wrote on Monday. “In most scenarios, the exchange rate would be weaker in the coming quarters.”

“Regulatory load”

Nevertheless, Russia’s big business lobby has raised alarms about the strengthening of the ruble and announced the creation of a special working group to monitor the monetary situation over the weekend.

“Excessive regulatory burdens on businesses in the area of ​​currency regulation and control must be avoided,” the Russian Union of Industrialists and Entrepreneurs said in a statement on the website.

The strength of the ruble is also potentially bad news for the budget, which earns a substantial portion of foreign currency-denominated energy tax revenues but spends in rubles.

“The stronger the course, the bigger the deficit,” said Evgeny Kogan, a professor at Moscow’s Higher School of Economics. “And it makes it more difficult for exporters, increases costs and reduces revenues” in rubles.

“If it takes, say, half a year, it will be extremely uncomfortable,” he said, adding that a “more comfortable” rate for the economy would be around 75-80 per dollar.

The press offices of the Russian Bank and the Ministry of Finance did not respond immediately to the request for comments.

(Update with the forecast of the Ministry of Economy in the fifth paragraph)

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