- Russia did everything to strengthen the ruble. And she succeeded, although this does not solve Moscow’s problems
- Forcing energy consumers to pay in rubles may affect the currency position in Moscow itself
- Behind the idea of the ruble requirement may be the Kremlin’s plan to make the ruble a strong currency used in the world for energy transactions along with the dollar and the euro
- Text published with permission of Geopolitical Intelligence Services
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In contrast to the invasion, occupation and subsequent annexation of Crimea in 2014, the West’s reaction this time to President Vladimir Putin’s military intervention in Ukraine likely surprised the Russian authorities: trade is severely restricted, Western companies are under pressure to withdraw from the country, and reserves are frozen Russian foreign exchange located in the West.
Not only was Russia completely cut off from major financial systems, but its use of gold stored in the Central Bank of Russia was also restricted. Of course, this wave of sanctions is not severe, and Moscow can still do business with much of the world, including China and India. Perseverance, patriotism, and Russian propaganda are likely to convince many Russians that making a bold face and sacrifice are more important than economic growth.
However, while sanctions will not destroy the economy and create intolerable hardship for the current people and leaders of Russia, they will continue to harm it, especially in the long run.
From the Kremlin’s point of view, many things have gone wrong, particularly in the financial sector. When many Russians saw that something was not going as planned and that they were likely to get into months of trouble, they began buying all kinds of consumer goods. The flight to supermarkets and durable goods in general, spurred by the increase in the ruble supply recorded in the last quarter of 2021, has pushed up consumer prices.
In mid-March 2022, annual inflation approached 15%, but was just under 2% on a weekly basis. At the same time, those who tried to exchange their cash and resident assets in rubles for dollars and euros. The result was a sharp depreciation of the ruble, from about 85 rubles to the euro in early February to about 150 rubles to the euro on March 10.
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It is understood that the Russian authorities blamed the West for the depreciation of the ruble exchange rate, the devaluation of inflation. At the same time, their reaction was to introduce capital controls, reduce convertibility, provide more rubles to support banks’ liquidity and raise interest rates on ruble deposits.
Soon, the government also announced that in the future Moscow would honor its debt in euros and dollars, but would require “enemy countries” to pay for energy imports in rubles. Some have called this policy the “ruble clause.”
The authorities can now brag about the stability of the ruble. In early April, you could buy 85 rubles for 1 euro, a slightly stronger exchange rate than before the war. Western operators may not be very interested in Russian monetary policy. But what about the ruble clause? Is this just a sneak peek of a little practical importance, or should we take it more seriously?
The requirement to pay in rubles hardly changes the picture of the international situation. Perhaps this is an attempt to convert the ruble into an international tender. If so, this step is premature, to say the least. The current efforts to improve the ruble’s image are more likely to be dictated by domestic affairs than by the ambition to play a larger role in the international financial market.
The presence of the ruble clause in Russian energy exports means that importers are forced to buy rubles to pay Russian exporters. Since there are currently limited amounts of rubles available on the currency markets, the main way to get them is to buy from the Central Bank of Russia at the rate (exchange rate) set by this bank.
So in the end, “hostile” Western importers will still pay for their imports in dollars or euros, but their partner will be the central bank, not the exporting companies. Is there a difference? The answer depends on the pricing mechanism, which leads to the second comment.
This is how the exchange rate of the ruble to the euro has changed since the beginning of February:
Energy contracts are usually denominated in dollars or euros. There is a good reason for that. In a world characterized by globalization of transactions, the relative price of energy, that is, the price of energy in relation to all other goods and services, depends on supply and demand. Manipulation of exchange rates does not cause major distortions.
For example, French nuclear energy exporters or Saudi oil producers cannot change the nature of the contract by manipulating the euro or dollar exchange rate after the contract is signed. This explains why the dollar and the euro are so successful in international currencies.
The situation would be different, however, if the Russian Central Bank restricted the complete convertibility of the ruble (for example, by controlling capital movements) or if the ruble was severely affected by the price of a limited number of commodities or commodities such as gas or oil. It can be argued that buyers can eliminate exchange rate risk by buying rubles in the futures market – that is, agreeing today on the price at which the ruble will be bought and sold in the future. In turn, a thriving FX derivatives market would encourage operators to hoard the ruble to meet the demand of speculators.
If this happens, then the ruble will gradually take on the role of an international currency, and the Central Bank of Russia will benefit from the mint’s rent: selling the ruble at no cost other than printing. is this real? Can Russians take advantage of such a pension by introducing the ruble clause? The answer is no. Mint rent is a bonus for transferability’s reputation and relative stability, and the Russian Central Bank lacks both.
The situation would be different if only the proposed transition to the ruble was repaid for previously agreed contracts denominated in dollars and euros, which now have to be respected in rubles at the rate dictated by the Central Bank of Russia. This would be like breaking the contract. Insisting on such a change would be self-defeating: it would weaken Russian operators as trading partners and likely hurt the Russian economy more than the sanctions currently in place.
In other words: if Moscow tries to implement the ruble clause, it will indicate its decision to default on Russian debts denominated in dollars and euros, at least those owned by “enemy countries”.
If the ultimate goal is to avoid default, then the interpretation of the demand for payment of the ruble should lie elsewhere. There are two possible answers.
One faces inward. The Russian authorities need large amounts of acceptable means of payment (gold, dollars, euros) to circumvent the Western financial embargo. As mentioned above, it is possible to bypass the blockade (for example, by the countries of Asia and Latin America), but it will not be cheap.
Therefore, President Putin must ensure that all foreign exchange earnings from energy exports go to the Central Bank of Russia, and not stored in opaque front companies and Western bank accounts. The ruble requirement excludes energy companies from the payment system and helps these dollars get to Moscow.
The second answer concerns the possibility of creating a solid ruble based on commodities, as opposed to its current status as paper money (i.e. not based on gold for example, but only on government guarantees). A hard ruble would probably be the best way to raise Russia’s prestige, kill inflation, and meet Russians’ expectations of a stable currency, as happened in Soviet Russia when Lenin introduced gold-backed daffodils in October 1922.
Is such a project possible? Can Crude Oil or Natural Gas Displace Gold as a Commodity Standard? Could this pave the way for other commodity-based currencies such as the Chinese yuan?
The answer is ambiguous. A hard ruble is likely to be partially successful domestically, but only if it is really hard – for example in the form of gold coins that people can keep at home. The liquid ruble – paper money backed by oil and gas – wouldn’t work because people wouldn’t trust paper gold pledges, let alone gas or oil. However, the liquid ruble can be a benchmark for a monetary standard similar to the currency board, a corset that prevents the central bank from pursuing monetary policy.
It is doubtful whether Moscow’s goal is fiscal rigor. Of course, the lack of confidence in the convertibility of money will disappear if Russia’s gold reserves are parked outside Russia. However, the Kremlin would not even consider such an option. The same is true of Beijing. It is possible that the recent tensions in the international arena have killed all the large zloty yuan projects as well.
Enrico Colombato is Professor of Economics at the University of Turin. He is also Director of Research at the IREF Institute for Economic and Financial Research in Paris.
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source:geopolitical intelligence services
Date created: April 12, 2022, 2:53 pm