“Russia’s ruble is reduced to rubble. Their economy will be cut to half. The ruble is crumbling now,” President Biden said during a speech on March 26 while visiting Poland, a country that has been taking in refugees from neighboring Ukraine.
The value of the Russian ruble tumbled 30 percent after the U.S. and its allies, including most of the European Union, Canada, Japan, Australia and almost all other major Western economies imposed sanctions in response to the Russian invasion of Ukraine. But the ruble has bounced back, almost doubling in value from its low point on March 7.
The recent gains mean the currency is now back to its level before broad based, hellish sanctions on the Russian government and its oligarchs were imposed, continuing its streak as the best performing currency in the world this year. This strong performance once again demonstrates the body politic in the U.S. has become like the other woman, wanting to believe the promises all too many politicians make about the future. They never change.
Russian energy exports drive ruble rebound
Why has the Russian ruble made large gains in spite of the sanctions? Reasons for that rebound include, surging energy prices, support from the Russian government putting huge capital controls in place to stabilize the ruble and the Russian Central Bank raised interest rates by as much as 20 percent.
Additionally, Russia required the European Union and other nations guzzling Russian oil and gas, to pay for the energy commodities in rubles since the U.S. and Europe weaponized the dollar denominated financial system. In effect, Russia has weaponized its energy in response to Western sanctions. Given super high energy prices, Bloomberg Economics estimates that Russia’s energy exports will increase this year by one-third to $321 billion.
Still further it is hard to ignore the lifeline other nations such as China, India, Brazil, South Africa, NATO member Turkey and others have tossed Russia by purchasing its oil and gas in rubles. Also, Riyadh is in discussions with Beijing to sell its oil to China for yuan in lieu of dollars. These purchases have given Russia a current account surplus—exporting more than it imports, stabilizing the ruble.
The decision to link oil and gas and other raw materials to the ruble threatens the hegemonic order of the U.S. dollar. In effect, Russia, the eleventh largest economy in the world by nominal Gross Domestic Product, has accelerated its de-dollarization. For the last several years, China and Russia have sought to reduce their use of the dollar in an effort to shield their economy from existing and potential future U.S. and other Western nations sanctions and assert global economic leadership.
Dollar dominates global economy, for now
The U.S. government has acknowledged that it can’t stop these purchases because there are no secondary sanctions on countries doing business with Russia.
The U.S. can use sanctions as a weapon and compel allies to go along with it or else because the U.S. dollar is the world’s reserve currency. For nearly 80 years the dollar has dominated the global economy because it is needed to conduct global trade. The U.S. dollar controls about four-fifths of all currency operations in the world. It is hard to imagine things being done in a different way.
The U.S. accumulated about two-thirds of the world’s gold reserves at the end of World War II. This was the basis for the Bretton Woods system of monetary management that ensured the U.S. dollar hegemony in the western world for many years.
China and Russia have tried for some time to de-dollarize in trade and investment with limited success but if their de-dollarization efforts gain traction there could be major implications for the U.S. economy, U.S. sanctions, and U.S. global economic leadership.