Russian rouble weakens amid oil price drop and forex shifts, limiting sanctions’ bite

The Russian ruble experienced a slight dip in value against both the US dollar and the Chinese yuan on Monday. This movement occurred despite two factors that usually strengthen a currency: rising oil prices and the Russian government selling more foreign currencies. Specifically, by 10:00 AM GMT, the ruble had fallen by 0.7% against the dollar, reaching 102.45, and by 0.8% against the yuan, trading at 13.81 compared to the previous day. These figures are based on over-the-counter market data and the Moscow Stock Exchange (MOEX), where the yuan has become the most traded foreign currency in Russia. The increased reliance on the yuan is largely due to China’s use of it to purchase energy from Russia, especially given the sanctions placed by many Western countries which limits the use of US Dollars and Euros.

The Impact of U.S. Sanctions

The recent fluctuations in the ruble’s value are directly linked to U.S. sanctions imposed on January 10th. These sanctions targeted Russian oil producers Gazprom Neft and Surgutneftegaz, as well as 183 vessels involved in transporting Russian oil. The aim is to diminish Russia’s earnings from oil and gas by directly preventing them from being sold internationally which reduces demand and price of the commodities. While sanctions often have the immediate impact of weakening an affected country’s currency, it is important to note that the effects are often short term so we see prices rise back up. However, these sanctions coincided with an increase in global oil prices, which have surpassed $81 a barrel, reaching their highest level in over four months. This surge in oil prices, typically a positive for a major oil-exporting nation like Russia, would normally strengthen the ruble as it increases the money flow into the country. However, the sanctions appear to have blunted some of this positive impact, demonstrating the complicated interplay of factors affecting global economics. For example, if Russia has less ability to sell its oil, the increasing prices may not result in more money being received. It simply means the cost goes up to the few who are still allowed to buy it.

Government Efforts and the Central Bank’s Role

To buffer the effects of the sanctions and stabilize the ruble, the Russian government has intervened in the currency market. The Finance Ministry announced on Friday that it would increase its net foreign exchange sales by nearly one-third, to 4.76 billion rubles (approximately $46.42 million) per day, starting January 15th. This action is intended to increase the supply of foreign currency on the domestic market, which can help prop up the ruble’s value, much like the central bank will intervene on a local market by placing a buy order. The Russian Central Bank is the entity conducting these foreign currency operations, buying and selling currencies both to maintain market stability and to manage transactions on behalf of the Finance Ministry’s National Wealth Fund (NWF). The NWF operates as a sort of “rainy day fund” which allows the Russian government to pay for things even if they don’t have enough immediate funds. This process was recently used to purchase some of the oil being sold to keep prices up. Due to Western sanctions, the Central Bank is restricted from dealing in dollars and euros, making the Chinese yuan the only viable option for these currency interventions. This highlights a strategic shift in the global economy as well as a shift in Russia’s geopolitical relationships.

Recent History and Market Stability

It is important to understand the events leading up to this current environment, which helps contextualize the current state of the Russian financial markets. In the previous December, the central bank, through policy changes such as delaying to purchase more foreign currency, had effectively supported the ruble. This action became necessary because, in November, the ruble had hit its lowest level in approximately two and a half years following the announcement of previous U.S. sanctions. The ruble has not only recovered but also stabilized since then. The market has established an informal “new normal”, and the market appears to have settled around 100 rubles per US dollar. This stability is significant as it demonstrates how intervention can counteract volatility in currency markets. It also provides a baseline against which to measure the ongoing effects of sanctions and intervention measures. The fact that analysts are pointing to this ‘new normal’ clearly shows how financial markets interpret these movements overall.

Geopolitics and Future Outlook

Analysts have highlighted that geopolitical factors are the central drivers affecting the long term ruble exchange rate. The expectation of upcoming discussions between the U.S. administration and Russia, as well as the ongoing pressures placed on the Ruble economy by international sanctions plays the biggest role. T-Bank analysts said “Geopolitics will remain the key factor influencing the rouble’s exchange rate in the near future.” This shows that it is not just economic factors that drive these prices. Future sanctions from the US, global conflicts, and even domestic political changes in Russia can all influence these markets. It is also important to remember that markets often respond to perceived upcoming events rather than the ‘present’ so expectations of these talks will likely influence prices before any meetings have taken place. This highlights how political actions can have real economic consequences, impacting the day to day lives of ordinary people who are reliant on these currency exchange rates.

Market Data and Wrap-up

Further evidence comes from tracking the one-day ruble/dollar futures, which are also traded on MOEX. These contracts, which serve as benchmarks for the over-the-counter exchange rate, have increased by 0.5% to 103.53. The official exchange rate, as reported by the Russian central bank, is at 101.91 rubles per dollar. These movements, although they seem small, offer a glimpse into the complex mechanics of international currency exchange and how these processes function. The difference between the official and over-the-counter rates demonstrates how market forces can create price discrepancies. This provides an explanation of the complex interactions between geopolitical events, sanctions, government interventions, and market sentiment, all of which together determines the value of the Russian ruble and the overall Russian economy.

Summary

The Russian ruble weakened slightly against the U.S. dollar and Chinese yuan despite rising oil prices, highlighting the impacts of recent U.S. sanctions and the efforts of some nations to limit the Russian economy. The sanctions, which targeted major Russian oil companies and vessels, coincided with a significant increase in oil prices, yet the ruble still declined. This odd contradiction emphasizes how sanctions can have complex and not always predictable effects on their targeted economies. Russia’s response has included increased foreign currency sales by the government, executed primarily via the Central Bank, using the Chinese yuan as the only viable option given most Western currencies are not available to trade. The ruble had previously stabilized after a period of significant volatility following earlier sanctions, establishing a new market equilibrium of approximately 100 rubles per dollar. However, geopolitical factors and future U.S. sanctions remain key considerations that significantly influence future rates of the Russian currency.

Frequently Asked Questions

  1. Why did the Russian ruble weaken despite high oil prices?
    • The U.S. sanctions on Russian oil producers and shipping companies have disrupted the usual positive correlation between oil prices and the ruble’s value. While high oil prices should benefit the Russian economy, sanctions disrupt the sale of these resources.
  2. What are Russia’s foreign currency operations?
    • The Russian Central Bank buys and sells foreign currencies to maintain market stability and to act on behalf of the Finance Ministry’s National Wealth Fund. The Chinese yuan is the primary currency used for these operations due to Western sanctions.
  3. How has the market adjusted to recent volatility?
    • The ruble hit its lowest in about 2.5 years and then recovered after government intervention over last December, settling at what the market views as a new equilibrium of around 100 rubles to the U.S. dollar.
  4. What are the main factors influencing the ruble’s future performance?
    • Geopolitical activities, like future U.S. sanctions, ongoing international relations with Ukraine, and diplomatic talks, are predicted to be the major drivers of the rouble’s exchange rate.
  5. How are sanctions measured to be successful?
    • Sanctions are measured based on their long term impact on their target. This could be limiting the targets access to materials or products, reducing their economic standing, or politically pressuring them into a desired outcome.

References

  • Reuters, Moscow. (2024). “Rouble dips as oil price rise, forex sales cushioned impact of new US sanctions.”