Vladimir Putin’s Russia Wins a Battle Against the West in the Ruble War.

Russian gas exports to Europe play a decisive role in Putin's favor.

Even before the beginning of the Russian invasion of Ukraine, Joe Biden had already ruled out any American military intervention in Ukraine. The idea is to avoid at all costs a direct military confrontation between America and Russia. This would be synonymous with a third world war, and this is a worst-case scenario that everyone wants to avoid. Even Vladimir Putin, as crazy as he may seem to some.

Thus, the war against Russia will be on the economic and financial level for the Western world. Everything is done to weaken the Russian economy and bring it to its knees. The goal is to make it impossible for Vladimir Putin's Russia to continue to finance his war in Ukraine.

The ruble recovers strongly, which is a strong political symbol for Putin

After a collapse of the ruble in the middle of March 2022, that is to say in the first fortnight after the beginning of the war in Ukraine, we are witnessing a spectacular recovery since. A recovery such that the U.S. dollar is now at 84 rubles, the level at the time of the invasion of Ukraine. It had even fallen below 79 rubles last week. The euro is worth 91 rubles, down from 94 before the war began.

The observed rebound took place in very low volumes on the Russian market, dominated by companies and a few banks like Gazprombank. On the dollar rouble, daily activity was $3 billion in April compared to about $20 billion in early January 2022.

Despite this, the ruble is still losing 11% against the dollar and 7% against the euro this year. Since its reopening on 24 March 2022, the Moscow Stock Exchange has risen as much as 13% in early April 2022 before falling back and stabilizing. The provision of liquidity by the Bank of Russia has stabilized the banking system. Many banks are dependent on the liquidity of the Central Bank. Others have preferred to increase their deposits with the Bank of Russia rather than feed the interbank market, given the uncertainties.

Thanks to its successes, paid for at a high price and in a hurry, the Bank of Russia has been able to relax other constraints a little: lower taxes on foreign exchange transactions, easier access for individuals to foreign currency through their bank, ... It also lowered its interest rates from 20%. Interest rates are now at 17%. The Bank of Russia had more than doubled them on 28 February 2022, raising them from 9.5% to 20% to cope with the crisis and the plunge of the ruble. It has not ruled out further easing to limit the contraction in activity this year, perhaps at its next meeting on April 29.

The current account surplus reached a record $58 billion in the first quarter thanks to soaring gas prices. It could reach $200-250 billion this year thanks to lower Russian imports and continued high oil and gas exports.

The strategy of the Bank of Russia is bearing fruit, for the moment ...

Thanks to a dirigiste and bureaucratic approach, which had been abandoned in the 1990s, the Central Bank ensures a flow of foreign currency generated by its gas and oil exports to pay for Russia's essential imports. The rise in the ruble may have a limited effect in containing inflation, but Vladimir Putin probably attaches symbolic political value to it.

To pay for Russian gas, European importers give their euros to Russian banks, which then convert them into rubles at a rate set by the Central Bank, and deliver them to Russian energy groups. Russia can thus reconstitute its safety cushion in foreign currencies thanks to banks like Gazprombank, which has become the armed arm of the Bank of Russia in the battle of the ruble.

Elvira Nabiullina, the president of the Bank of Russia, told parliament that her country had enough diversification assets left after the United States and its allies imposed a freeze on its assets. At the beginning of January 2022, 17.1% of its assets were invested in Chinese debt and 21.5% in gold. Since 2014, its investments in precious metals have more than doubled.

The Central Bank is committed to purchasing gold for 5,000 rubles (55 euros) per gram within three months, which is below the current price (58 euros). It is counting on patriotic support from its citizens to bring in their gold. Just over one-third of the central bank's assets (33.9%) were invested in the euro at the beginning of the year and 10.9% in the dollar, half as much as in 2021 (21.2%). Its financial assets, frozen or not, were around $604 billion in March 2022.

Final Thoughts

Everything seems to indicate that Vladimir Putin has won a battle in the ruble war. The reason remains known to all: the hesitation of European countries to cut short their important Russian gas supplies. I am thinking of Germany, which is holding back for fear of falling into a recession. This benefits Putin and Russia, whose economy is suffering but is resisting enough to continue the war effort in Ukraine.

Stronger decisions will have to be made on the Western side to win this ruble war.