The Russian ruble is the best performing currency in the world this year.

Two months after the value of the ruble fell to less than a US penny amid the fastest and toughest economic sanctions in modern history, the Russian currency has made a stunning turnaround. The ruble has jumped 40% against the dollar since January.

“It’s an unusual situation,” said Jeffrey Frankel, professor of capital formation and growth at Harvard Kennedy School.

Normally, a country facing international sanctions and a major military conflict would see investors fleeing and a constant outflow of capital, causing its currency to fall. But Russia’s unusually aggressive measures to prevent money from leaving the country, combined with the force of Western sanctions, are helping to create demand for the rubles and drive up its value.

The resilience of the ruble means that Russia is partly immune to the punitive economic sanctions imposed by Western nations after its invasion of Ukrainealthough the duration of this protection is uncertain.

Why the ruble has recovered

The main reason for the recovery of the ruble is the surge in commodity prices. Following Russia’s February 24 invasion of Ukraine, already high oil and natural gas prices rose further.

“Commodity prices are currently very high, and even though there is a drop in the volume of Russian exports due to embargoes and sanctions, the increase in commodity prices more than compensates for these declines,” Tatiana said. Orlova, chief emerging markets economist at Oxford Economics.

Russia pulls nearly $20 billion a year month from energy exports. Since the end of March, many foreign buyers have complied with a request to pay for energy in rublesdriving up the value of the currency.

At the same time, Western sanctions and a wave of companies leaving the country led to a drop in imports. In April, Russia’s account surplus – the difference between exports and imports – hit a record $37 billion.

“We have this coincidence that while imports have crashed, exports are skyrocketing,” Orlova said.

Closing the valves

Russia’s central bank has also backed the ruble with strict capital controls that make it more difficult to convert to other currencies. This includes a ban on foreign holders of Russian stocks and bonds withdrawing dividend payments from the country.

“It used to be a pretty big source of currency outflows from Russia – now that channel is closed,” Orlova said.

Meanwhile, Russian exporters are required to convert half of their excess revenue into rubles, creating demand for the currency. (The conversion requirement was 80% until this week when it dropped to 50%.) On top of that, Orlova noted, it is extremely difficult for foreign companies to sell their Russian investments, another obstacle to capital flight.

“While we see these announcements of Western companies leaving Russia, they often just have to hand over their stakes to their local partners. This does not actually mean that they receive a fair price for their stakes, so they are not move large sums of money out of the country,” she said.

All of these factors create a demand for rubles, increasing the value of the currency.

“Although it is not a free market determined exchange rate, the stability of the ruble is at the same time ‘real’, in that it is driven by record current account inflows from Russia,” said Elina Ribakova, deputy chief economist at the institute. of International Finance (IIF), said via email.

How long will the rally last?

The ruble’s rally has been so strong that it is creating challenges for Russia’s central bank, which this week took action bring its currency closer to historical levels.

“Russia’s central bank is trying to ease capital controls because they believe the ruble is too strong,” Ribakova said. “But the central bank is in a tough spot. If it continues to slack off, it could open the floodgates for capital flows out of the country. In previous crises, $200 billion left the country in a few months.”

But while the ruble’s rebound and strong oil exports from Russia have temporarily shielded the economy from sanctions, that’s unlikely to last. European nations have pledged to cut their imports of Russian gas by two-thirds this year, for example – a potentially crippling blow given Russia’s reliance on energy exports.

A sign that the Russian economy remains under severe pressure is that inflation in Russia is more than double the rate in the United States. This creates pressure for Russians to move their money out of the country, said Frankel of the Harvard Kennedy School.

“The temptation to take assets out of Russia, for Russian citizens to find a way around controls…will grow, especially with the inflation rate now as high as it has skyrocketed,” he said. he declared.

Another concern for Russia is that stopping imports could lead to shortages, while a decline in foreign investment is expected to dampen the country’s economic growth for years, the Institute of International Finance has predicted. IIF expects Russian economy to contract 15% this yearwiping out more than a decade of economic development.

“Export controls, the ‘brain drain’ of talent out of the country, a European shift in Russian energy dependence, and an exceptionally hostile business climate will all weigh on Russia’s growth in years to come,” Ribakova said.