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The ruble in good condition, but the default is lurking

The ruble is doing better, but the Russian state is likely to soon pay for the economic sanctions taken against it after the invasion ofUkraine† After a historic collapse, the ruble has regained its colours, a success fueled by the energy windfall in the face of Western sanctions, but which does not reflect the real health of the economy.

In late February and early March, the ruble reached an unprecedented level against the dollar: 100 rubles, then 120… to over 140 rubles per dollar on March 7. But since that day, the Russian currency has continued to appreciate, reaching 71 rubles per dollar on Friday, a record since the fall of 2021, and 77 rubles/euro, the highest level since June 2020. For the authorities, this is excellent news, with the rate of the ruble is an indicator closely watched by the population, indicating that the sanctions are not affecting the Russian fortress.

The ruble boosted by oil and gas prices

According to Sofya Donets, chief economist of the Russia at Renaissance Capital, the answer lies in an unprecedented trade surplus. “Imports to Russia have declined, while exports are solid, and with high hydrocarbon prices giving an estimated trade surplus of $20-25 billion in March,” a record economist said. Oil and gas, Russia’s main exports, continue to flow and fill Russia’s treasury.

Robust exports are complemented by draconian capital controls put in place by the Central Bank. All exporting companies were forced to sell 80% of their export earnings to buy rubles. Individuals are limited to $10,000 purchased per month and one cannot leave the area with more than this amount. With most international transfers blocked and foreigners banned from selling their Russian assets, the financial market finds itself in a vacuum.

“It gives them room to focus on domestic problems,” according to a note from Renaissance capital, namely balancing runaway inflation and the looming recession. The investment bank predicts a peak of 24% inflation in the summer, before a decline. In March, inflation rose to 16.7% in a year, data from the statistics agency Rosstat released Friday, a level not seen since early 2015.

Financial rating downgraded to “selective default”

“The rate of the ruble has become a local instrument, there are no financial flows. The market is currently destroyed and the price of a currency is a factor in international trade,” notes Sofya Donets.

Financial rating agency S&P Global Ratings on Saturday lowered Russia’s rating for its foreign currency payments to “selective default” levels after Moscow settled a dollar-denominated debt early in the week. There’s only one notch lower: the note “D”, default.

“We do not expect investors to be able to convert these ruble payments into dollars equal to the amounts originally owed, or that the government will convert these payments within the 30-day grace period,” the S&P said.

The agency believes sanctions against Russia are likely to be strengthened in the coming weeks “impeding Russia’s willingness and technical capabilities to fulfill the terms and conditions of its obligations to foreign debtors”.

Russia pays off its debts in rubles

For several weeks, Russia has averted the danger of bankruptcy as the US Treasury Department has allowed the use of foreign currency held abroad by Moscow to pay off foreign debt. Thus, in March, Russia paid several tranches of interest, demonstrating its willingness and ability to repay.

But as of Monday, the United States no longer allows Russia to repay its debt with dollars held in American banks. As a result, JPMorgan, acting as correspondent bank, blocked a payment.

As a result, Russia’s finance ministry announced on Wednesday that it had paid nearly $650 million in rubles, due on April 4.

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