SURPRISE: The Russian ruble (RUB) is the best performing currency this year against the soaring US dollar, up by 30%. This is near a seven-year high and more than double its post-Ukraine invasion lows. The Brazilian Real (BRL) is the only other major currency to be up (see chart). A combination of capital controls, high-interest rates, and high commodity prices have driven this currency surprise, despite the Ukraine war. But with the ruble now among the world’s most expensive currencies, controlled weakness is ahead. The authorities are easing interest rates and capital controls, whilst oil prices have seen their highs. Watch out below.
SUPPORT: This contrarian ruble strength has come from the triple support of draconian capital controls, high-interest rates, and lower US dollar demand. Tough capital controls have included restrictions on Russian withdrawing foreign currency savings, among many measures. Whilst policy interest rates were doubled to 20%, making Russia was one of very few in the world with rates above inflation. Meanwhile, we likely saw a sharp fall in demand for dollars, as commodity prices rose at the same time as import demand fell, with western sanctions and a slowing economy.
EASING: This triple support is now easing. The ruble surge helped make it among the world’s most overvalued currencies, behind only the US dollar, and those tied to it like Saudi Arabia and Hong Kong. Russia is now loosening capital controls, recently allowing ‘unfriendly countries to trade in the ruble market. It’s also been slashing interest rates, to 9.5%, as inflation has cooled.
