The global ruble rally poses a new risk to the Russian economy

Russia’s ruble has surpassed all major currencies against the dollar this year, a rally that has caught policymakers off guard and threatens to undermine the country’s wartime economy.The ruble has appreciated 45% since the start of the year and is trading at almost 78 per dollar, within easy reach of levels before Russia’s massive invasion of Ukraine almost four years ago. The past 12 months have seen the strongest appreciation since at least 1994, the data show.

A key driver has been a sharp decline in foreign currency demand in Russia due to international sanctions, while exceptionally tight monetary policy has increased the appeal of ruble assets for residents. The central bank’s policy rate remained at a record high from October last year until June, before policymakers cut it by a total of 5 percentage points to 16%.

The government had forecast an average exchange rate of 91.2 per dollar for this year. Resilience has persisted despite weaker oil prices and new US and European sanctions, adding to pressure on public finances by squeezing exporters’ earnings when converted into rubles.

Support for the currency also comes from the Bank of Russia’s foreign exchange sales, mirroring the Finance Ministry’s activities as it divests yuan and gold from the National Welfare Fund to replace lost energy revenue. Revenues from the oil and gas budget fell by 22% in the first eleven months of the year, according to data from the Ministry of Finance.

The ruble’s rise this year puts it among the five best-performing global assets in terms of spot returns, after platinum, silver, palladium and gold, according to data compiled by Bloomberg.

For the central bank, a stronger ruble is welcome in the fight against inflation, and Governor Elvira Nabiullina has indicated that the disinflationary effect has not yet been exhausted.