Why the ruble is falling or growing

Main article: Russian ruble

Market factors

Oil price spikes

Main article: Oil prices

Oil is the main export commodity of Russia, and it is on its price that the volume of foreign exchange earnings and, accordingly, the exchange rate of the Russian currency depend.

Macroeconomic factors

The growth of the money supply leads to an increase in imports and a change in the trade balance

Main article: Money supply of Russia

One of the main areas of accumulation of demand for foreign currency is foreign trade (import of goods and services).

The ability to import is due to the current currency movement (displayed in the balance of payments), the accumulation of foreign currency balances in internal and external cash and investment accounts and the presence of ruble flows (income) and balances (money supply).

Ruble flows and assets exert direct pressure on the foreign exchange market through conversion operations.

The chart shows a high correlation between the ruble M2 expressed in dollars and the volume of imports of goods and services for the year.

Source: Spydell Finance

What does it mean? At high rates of growth of the money supply, the ruble exchange rate acts as a natural market limiter of excess demand for imports without the possibility of absorption through exports and investment inflows of currency under the conditions of sanctions of Western countries.

From mid-2022 to early 2024, dollar M2 rose sharply due to a strong ruble, which was offset by a faster devaluation from June to September 2023.

If exports are reduced and imports grow, the country's trade balance is reduced and the currency becomes cheaper. In Russia, the decline in the trade balance in the early 2010s was most often associated with a decrease in oil and gas prices.

Outflow or inflow of capital

The outflow of capital from the country reduces the exchange rate of the national currency, and the inflow increases.

What should be taken into account in the new sanctions reality in Russia from 2022?

• The flows of international capital (non-residents) due to the differential of interest rates, the level of profitability and the growth rate of financial and economic indicators in Russia have been zeroed. Neither the level of rates in Russia, nor the profitability of the business, nor the market characteristics now affect the inflow or outflow of foreign capital.

• Blocking of Russian residents makes it impossible for the free inflow of capital of residents of the Russian Federation as it was until 2022 (direct and portfolio external investments are practically zeroed out from 2022), and all outflow is concentrated in cash assets, trade loans and receivables.

• The share of settlements in the national currency and the currency of neutral countries is growing. Prior to 2022, about 85% exports and 66% imports were in the currency of unfriendly countries, and in 2024 25% exports and 28% imports.

• Over 40% in the structure of the outflow of currency from Russia from 2022 formed external debt (the need to repay), and by 2024 almost all external debt was repaid, which in the future will reduce the demand for currency.

Demand for shares of Russian companies

The greater the demand for Russian assets (including shares on the exchanges), the higher the exchange rate of the national currency.

Regulator policy

Central Bank Interest Rate

The ruble exchange rate is negatively affected by a decrease in interest rates of the Central Bank. When the Central Bank lowers interest rates, the volume of loans to banks increases, therefore, the volume of money supply grows.

In 2023, cheap ruble loans encouraged exporters to fund in rubles at relatively low rates to meet tax requirements, keeping foreign exchange earnings, which led to a strong temporary weakening of the ruble. The rise in the Central Bank rate to 15% destroyed this scheme.

Seasonal factors

End of Tax Payout Period

The end of the tax payment period negatively affects the ruble exchange rate, as the demand for Russian currency is decreasing. The need for companies to pay taxes and, therefore, sell off part of foreign exchange earnings for rubles arises at the end of each month and quarter.

Large companies pay dividends in May and June

May-June traditionally accounts for a significant part of dividend payments, and many Russian large private companies have owners abroad (even if they are Russian, they are offshore). This puts additional pressure on the ruble.

Start of vacations

The beginning of the vacation season is a factor that traditionally reduces the exchange rate of the Russian currency at the beginning of summer, and increases by autumn. The mechanism itself is simple: when heading abroad, citizens buy currency, which increases the supply of the ruble on the exchange and the demand for dollars and euros. As a result, the Russian currency is getting cheaper. To assess the impact of this factor, it is enough to recall that annually, according to Rosstat, more than 15 million Russian tourists travel abroad. In 2012, they spent $43 billion in foreign countries. This, for comparison, is half of Gazprom's annual export revenue.

See also

Russian economy