Russian ruble recovers to pre-war levels in Ukraine, inflation soars
The Russian ruble not only recovered to pre-war levels in Ukraine, but also hit a two-year high against the US dollar on Friday, April 29.
The currency has gained ground and is now among the best performing currencies in the world after Russia said it successfully repaid Eurobonds with US dollars, as the country tries to avoid a default.
The rebound in the ruble allowed the Central Bank of Russia (CBR) to cut key interest rates by 17% to 14% per year, after an earlier cut of 20% on April 8.
“Today’s decision by the Bank of Russia together with the government’s current preferential lending programs will support the availability of credit resources in the economy and limit the extent of the decline in economic activity,” explained CBR in a statement.
However, the disinflationary impact of monetary policy will remain in place, he warned. Given the monetary policy stance, annual inflation is projected to reach 18.0-23.0% in 2022, slow to 5.0-7.0% in 2023 and return to 4% in 2024.
According to the CBR’s baseline forecast, Russia’s GDP is expected to fall by 8.0-10.0% in 2022, mainly due to supply-side factors.
The ruble is recovering thanks to artificial demand
After Russia invaded Ukraine in late February, the CBR raised interest rates from 9.5% to 20% in an emergency effort to help the ruble plunge by preventing Russian brokers from selling securities held by foreigners. Strict capital controls have also been put in place.
The Russian currency had briefly slumped around 10% to a record low of 90 against the US dollar on the first day of the invasion of Ukraine, February 24.
Thereafter, its value continued to fall to extremely low levels impacted by international sanctions imposed on Russia in response to the war in Ukraine.
It reached its lowest value on March 7.
However, Russia has since been able to prop up the ruble by creating artificial demand for its currency, even in the midst of a failing economy.
At the end of March, Russia demanded that all payments for gas and oil deliveries by “hostile” countries be made in roubles.
Last week, a source close to Russian gas giant Gazprom claimed that four European countries had already paid for the gas in roubles, while at the same time the company completely cut gas supplies to Bulgaria and Poland.
According to Reuters, Poland’s climate minister called on the European Union to penalize countries that use rubles to pay for Russian gas.
The rebound of the ruble affects the euro
Analysts say accepting payments in rubles will further strengthen the Russian currency, making energy more expensive for Europeans and their economy which has yet to recover from the pandemic.
While the ruble is recovering, the euro is already weaker against the US dollar than it was in 2017 and 2019.
In the meantime, Greece is rushing to reduce its dependence on Russian energy imports by diversifying its resources.
As Greece imported 33% of its gas supply from Russia in January, Athens called on the EU to support member states and businesses against a further rise in energy costs.
In March, Prime Minister Mitsotakis assured parliament that his government was prepared for a “worst-case scenario where Russia’s gas supply would be interrupted” as its liquefied natural gas (LNG) storage facility at Revythousa been recently replenished.
In January, Greece covered 47% of domestic demand with LNG from Revythousa and 20% via the TAP gas pipeline.