Rouble’s strength is sign of Russia’s weakness

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LONDON, April 6 (Reuters Breakingviews) - The Russian rouble’s recent sharp rebound reflects economic weakness, not resilience. After shedding 45% of its value against the dollar in the two weeks after Russia invaded Ukraine, the currency has bounced back and is now trading just below its pre-war level.

But the tools that have been used to prop up the rouble make it look like a Potemkin currency – like the fake façades ordered by the eponymous prince to fool Empress Catherine II into thinking Russian villages were prosperous. Since Feb. 24, the day the Russian invasion began, the central bank has raised its key interest rate from 9.5% to 20%, slapped capital controls on much of the economy, and forced Russian exporters to convert their foreign currency revenues into roubles. Meanwhile President Vladimir Putin is trying to make buyers of Russian gas and oil pay in roubles read more .

The efforts to shore up the rouble are in line with one of Putin’s key beliefs. The humiliation of the steep devaluations of the 1990s helps explain why a stable currency has been a key element of policy since he came to power more than 20 years ago. Central bank chief Elvira Nabiullina’s relative independence has been respected because she has been a fierce guardian of the currency’s stability.

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Yet the rouble remains at the mercy of any Western embargo on Russian oil and gas. The punitive 20% policy rate will further hurt an economy that the European Bank for Reconstruction and Development expects to shrink 10% this year, just on the basis of sanctions already taken. High interest rates will deter investment, trade restrictions will send imported prices higher, and Russians may find they have little use for a stable rouble in their fast-closing economy.

A view shows a Russian one rouble coin in this picture illustration taken October 26, 2018. Picture taken October 26, 2018.

Sanctions are likely to last longer than analysts seem to expect when they cheer at the smallest indication of a possible compromise between Moscow and Kyiv. But even if they were lifted, the rouble would come crashing down to reality. One of the reasons its exchange rate has recovered is that trading has been particularly thin in the last few weeks. If price discovery were to work unrestrained in a freer market, the rouble would reveal the real scale of the economic hole in which Russia finds itself.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)


- The Russian rouble has recovered much of the ground it had lost after Russia attacked Ukraine in February. It was trading at 82.52 roubles to the dollar at 1323 GMT on April 6, compared with 81.41 roubles on Feb. 23, the day before the invasion began.

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Editing by Swaha Pattanaik and Streisand Neto

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