Sanctions against Russia are gradually increasing. Nevertheless, after a period of a sharp collapse in late February, the ruble exchange rate began to strengthen, reaching in April the level prior to the invasion of Ukraine.

After the start of the invasion of Ukraine on February 24, the ruble depreciated against the dollar within two weeks by over 50%, rising from 76.8-80.4 rbl / USD from 22 to 23 February to 120.4 rbl / USD on March 11.

The rapidly weakening ruble began to be perceived as the first symptom of the inevitable collapse of the Russian economy under the pressure of sanctions. The weakening exchange rate caused mass withdrawals of foreign currency deposits from banks by the population. As a result of a series of actions and decisions by the Central Bank of Russia (CBR), the outflow from foreign currency accounts after March 10 was gradually decreasing, and at the beginning of April, it completely disappeared.

An important factor reducing the demand in the foreign exchange market was the measures to radically restrict the flow of capital, including the decision to prohibit the sale of securities and the export of foreign exchange.

Despite these restrictions, the ruble exchange rate continued to weaken, which is why on March 9 CBR introduced one of the most severe currency bans for the population in modern Russian history. For six months (from March 9 to September 9), the Russians will not be able to buy foreign currency, and they can only withdraw 10,000 USD from their bank accounts and only from old deposits.

The Russian foreign exchange market started to operate in the conditions of the ever-deepening chronic surplus of supply over demand, which resulted in a rapid strengthening of the ruble exchange rate.

The main source of currency inflow, which reached $ 1.7 billion in the past two months per day was an increase in the prices of basic goods in Russian exports, primarily gas and oil.

For the CBR, the strengthening of the ruble poses another challenge, as it reduces budget revenues.

With existing trends strengthening, the Russian economy could find itself in a “unique” situation with a strong ruble, a stable financial system isolated from the rest of the world, a trade surplus and rebuilt reserves, with a simultaneous economic collapse, decline in industrial production and investment, while operating in growing isolation. Such a situation would probably require significant changes in economic theory.

Jerzy Rutkowski

The author is a former advisor to the minister in the Ministry of Economy and the Ministry of Development order