From my perspective, it’s quite fascinating to follow what is going on with the Russian ruble. I mean, we are seeing an extremely weak currency climb its way out of an international war against its survival. Much to the chagrin of those in the West imposing sanctions on the Russian economy, this nearly worthless currency is climbing in defiance. The Indian newspaper, Business Standard, even recognized it as “the best-performing currency in March.1”
So, what gives? Well, only time will tell, but Russia has made a series of recent moves that certainly must be playing a role. The Russian central bank had hiked its key interest rate significantly after the sanctions in an effort to strengthen the currency (we’re talking a hike of 1,050 basis points up to 20%!2). You’d be hard pressed to see any other government in the world doing such a thing right now. All other central banks are in full monetary inflation mode until something breaks.
And Russia’s position to demand payment in rubles by those dependent on Russian energy also may be supporting the currency. Earlier this month I wrote about this gas-for-ruble scheme, wondering if Europe was going to stiff Russia once the payments came due.
But, sure enough, many in Europe caved and paid in rubles. Poland and Bulgaria on the other hand, failed to heed to the ruble demand. So Russia held the line and has halted gas supplies.3 It will be interesting to see how this continues to play out.
But what had me most interested in the ruble phenomenon was when last month, Russia declared it would resume gold purchases at a fixed price of 5,000 rubles per gram. I saw this as a potential pathway to a Russian gold standard. This fixed price was below market value at the time … now it’s at a premium.
The Battle Within Russia
But on April 8th, the Bank of Russia did an about-face and stopped its gold purchases at the fixed price and instead announced it will buy at a “negotiated price.” Talk about loss of credibility right out of the gate. This certainly doesn’t inspire faith in the ruble.
It seems there are conflicting goals within the Russian establishment regarding the path of the ruble. The Kremlin wants a sovereign ruble pegged to gold. But the Central Bank of Russia wants nothing of the sort. It’s almost as if the central bank is working against the recent strengthening of the currency.
Bank of Russia Governor, Elvira Nabiullina, stressed the idea that rubles should have a floating exchange rate. Not to mention that the central bank cut its key interest rate sharply by 3% earlier this month, only to cut it another 3% just yesterday.4
I fully expect to see the ruble lose it recent gains because of these recent actions imposed by Russia itself, not necessarily because of Western sanctions. Will the Kremlin be able to steer its central bank back on course? We shall continue to see.
It is disheartening to see world governments continue their belligerent posturing and exacerbation of this war in Ukraine. Just a few days ago, President Biden called for another $33 billion dollars to be sent to the Ukrainian government.5 This is on top of already double-digit billions being given to Ukraine. Not a dollar has been spent on diplomacy. There is not a diplomat in sight.
Of course, the Ukrainian people are being used and abused in the proliferation of this thing. And why would Ukrainian leaders on the receiving end of this incredible cash cow want to end the war?
It’s as if the West has no interest in ending this war and will continue fighting it by proxy until Russia caves or the ruble dies. Perhaps the Bank of Russia will help accelerate the ruble’s crash.