Despite sanctions, why is the Russian ruble so strong? : The Indicator from Planet Money Why is the Russian ruble so strong right now? Despite heavy sanctions, the Russian government has a special trick – a serum, if you will – up their sleeves.

The artificial strength of the Russian ruble

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This is THE INDICATOR. I'm Paddy Hirsch. I'm joined today by Planet Money's Erika Beras. Erika, thank you for joining us today.

ERIKA BERAS, BYLINE: Oh, so happy to be here.

HIRSCH: Well, it's a delight to have you. And today, Erika and I are going to talk about the Russian ruble. Back in February, when Russia invaded Ukraine and a coalition of nations imposed sanctions on Russia, President Biden said that Russia's currency, the ruble, would be reduced to rubble. And initially, it looked as though it might go that way. The ruble dropped 50% in value against the dollar, giving Biden an opportunity to gloat a wee bit.


PRESIDENT JOE BIDEN: One ruble is now worth less than one American penny.

BERAS: But just 36 days later, the ruble was right back where it was when the war in Ukraine began, and it was Vladimir Putin who was rubbing his hands with glee. And today the ruble's even higher. In fact, it hasn't been this high since 2015.

HIRSCH: And looking at this remarkable recovery, I can't help think of the supervillain Bane from the "Batman" series. You know who Bane is - big dude wracked with muscle, super strong. He wears the scary mask that makes him sound like a cross between, I don't know, Darth Vader and Prince Charles.


TOM HARDY: (As Bane) Oh, you think darkness is your ally? You merely adopted the dark. I was born in it, molded by it.

BERAS: But here's the thing about Bane - the reason he is big and muscled and powerful isn't because he works out a lot. It's because he ingests a serum that gives him superhuman strength.

HIRSCH: And guess what - Russia and its currency, the ruble, is just like Bane - well, kind of like Bane. When sanctions hit, Russia went to that cabinet - you know, the one deep in the Kremlin, the one that says in case of emergency, break glass. Well, it went down there, and it busted out the serum, jabbed it into its arm and boom - instant currency strength.

BERAS: On today's show, we're going to tell you what that serum was, how it worked, and a little bit about the side effects.

HIRSCH: Because there are always side effects.

BERAS: Always. That's coming up after the break.


BERAS: We've talked before on the show about Fortress Russia. That was Russia's strategy hatched in 2014 to combat sanctions by hoarding billions of dollars in foreign currency.

HIRSCH: And Fortress Russia was a cunning plan, but it didn't work out so well because the coalition that imposed sanctions blocked Russia's access to that money.

ELINA RIBAKOVA: They were completely unprepared for the freezing of their foreign exchange reserves. So that was a shock, and that was a surprise.

BERAS: Elina Ribakova is deputy chief economist at the Institute of International Finance. She says those restrictions on using that foreign capital increased the likelihood that Russia could default on its debts.

HIRSCH: And that crushed confidence in Russia, and it trashed the ruble, which halved its value. It looked to the world as though Russia was on the ropes. And then...


AIDAN GILLEN: (As Bill Wilson) Who are you?

HARDY: (As Bane) It doesn't matter who we are. What matters is our plan.

BERAS: Bane.

HIRSCH: Bane - yes. When the ruble hit the skids and the central bank of Russia found that it couldn't use all of that lovely Fortress Russia cash that it had saved up, it decided on plan B - B for Bane. It broke the glass on that emergency cabinet, and it deployed the serum.

BERAS: A serum known as capital controls - that's when a government or a central bank steps in to stop foreign capital - that's dollars and euros and yen - from flowing out of the country. And Elina says the capital controls adopted by the Kremlin took several forms.

RIBAKOVA: They more than doubled interest rate. And basically, they froze any dollars or euros you had in your bank account. It could have been any foreign bank or domestic bank. So you could no longer have access to it.

HIRSCH: The freeze extended to the ability of Russians to convert rubles into dollars.

RIBAKOVA: If you would like to convert some, you know, rubles since you were worried about the crisis and maybe would like to flee the country, you could not do that either.

BERAS: Government also targeted foreign investors who wanted to cash out of Russia.

RIBAKOVA: So if you make a phone call, I would like to sell Russian stocks and get my money out, they would say, you know what? We're not picking up that phone call.

HIRSCH: These measures - doubling interest rates, freezing accounts and restricting trading - they're not unheard of, but they're highly unusual. I mean, freezing accounts is the kind of thing that countries in really dire economic straits have done in the past. Argentina in 2001 is a good example. They do it to keep as much foreign currency in the country as possible.

BERAS: And in this case, it worked. The dollars and the euros stopped flowing out of Russia, which meant that it did indeed have the foreign currency it needed to service its foreign debt. That put a floor under the ruble and stopped it falling.

HIRSCH: The Kremlin then gave itself a second dose of serum. It ordered all Russian countries doing business overseas and getting paid in foreign currency to convert 80% of those revenues into rubles. This, of course, created instant demand and jacked the ruble higher.

BERAS: The serum of capital controls turned Russia into Bane - big, angry and with a miraculously muscular currency. But Elina says it's not just an artificial shot in the arm that has helped the ruble rise.

RIBAKOVA: Commodities have been skyrocket high. We have unprecedented prices for oil, gas. And about half of total Russia's exports is oil and gas.

HIRSCH: The initial rhetoric from the U.S. and other sanctioning countries was that Russia's ability to make money from oil and gas would be severely curtailed. But that has not happened.

BERAS: European nations have continued to buy gas from Russia. Other non-sanctioning nations like China and India have bought a lot of its oil. And even though Russia has cut its oil price by as much as 30%, it is still making money.

HIRSCH: And that is how the ruble got so strong, so fast. It recovered initially thanks to a series of emergency measures by the government to prop the ruble up artificially.

BERAS: And its recovery has been sustained by the failure of a key sanction on oil and gas that has kept foreign capital, including euros and dollars, flowing into Russia.

HIRSCH: So on the outside, Russia looks pretty healthy right now, just like Bane. But here's the thing about Bane - that serum that he takes to make him strong, the first time he took it, it nearly killed him.

BERAS: Elina says Russia risks something similar. She says a super strong ruble is now hurting the country in several ways - first, by impacting its budget, which is heavily dependent on revenues from oil and gas.

RIBAKOVA: The oil sector gets its money in foreign exchange but pays taxes in local currency in rubles. So as the exchange rate gets stronger, it means fewer rubles go into the budget.

HIRSCH: And while that strong ruble is shrinking Russia's budget at home, it's simultaneously damaging its efforts to sell its goods overseas. I mean, even if Russia can find people willing to buy its stuff, when the ruble is strong, those goods become more expensive. And that makes it a lot harder for it to build new markets.

BERAS: Russia's central bank realizes all of this, which is why it started to cut back on the serum, trying to take the heat out of the ruble. Many of the capital controls are now gone.

HIRSCH: And the question is, will the ruble be able to float without those supports? Or like Bane without his regular injections of serum - and he needs one every 12 hours, by the way - will the currency and financial system crash?

RIBAKOVA: If your economy is contracting, basically collapsing - if nobody wants to trade with you, there is little to celebrate there. You might have a strong currency at the moment, but if anything, it's damaging you.

BERAS: Elina says Russia may continue to tinker with the financial system and the currency to make it look as though everything is functioning normally. But, she says, the currency and the economy are not the same thing. And in Russia, they are becoming increasingly disconnected.

HIRSCH: Yeah. For now, the ruble is strong, and revenues from oil and gas are keeping the Russian economy afloat. And that's encouraging economists to say Russia's economy may shrink just 3.5% in the coming year rather than the 10- or 12% that was originally predicted.

BERAS: But long term, the Russian economy appears to be in deep trouble. By turning away from the West, Russia has set its industry back decades. Auto production, for example, is down 97% because Russian factories can't get the parts they need.

HIRSCH: Those kinds of issues are being replicated right across the Russian economy, and they're problems that a strong currency just can't fix on its own. So the ruble may look good for now. But just like the mask worn by the "Batman" character Bane, the ruble seems increasingly like a facade - disguising an entity in deep decline.


HIRSCH: This episode is produced by Corey Bridges with engineering support from James Willetts. It was fact-checked by Kathryn Yang. The show's senior producer is Viet Le. Kate Concannon edits. And THE INDICATOR is a production of NPR.

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