Ruble at Multiyear Highs against Dollar, Euro

The U.S. dollar extended its losses against the Russian ruble on Friday, May 20, dropping to the lowest level since April 2018, while the euro landed at its weakest point against Russia's currency since mid-2017. The dollar additionally dropped over 5% against the ruble, selling at 59.632 at 12:20 p.m. CET, while the euro gave up 5.35% against the Russian currency, to go for 61.487.

The reason for such massive and rapid ruble strengthening amid harsh international sanctions is very unsettling for many economists. We tend to find explanation in a synergy of unique mutually reinforcing factors, including:

● Russia’s Minfin order of mandatory sale of 90% export proceeds in foreign currencies which greatly boosted currency bids to buy rubles at Moscow Exchange

● Decision of VISA and MasterCard to block foreign purchases from the currency cards issued by Russian banks

● Russia’s provision to buy energy exports for rubles (some countries are already reportedly following the new procedure)

● Very low interest rates on currency deposits not meeting contemporary global inflation metrics (Russian banks are disinterested in luring more currencies on their balance sheets amidst lack of their applications)

● Tax reporting season requiring more rubles to pay taxes (read below)

The ruble is strengthening as the West has yet to agree on a full oil embargo against Russia, a major global energy producer and exporter, and after Russian Deputy Prime Minister Alexander Novak revealed yesterday that additional natural gas importers decided to comply with the Kremlin's new payment requests and expressed skepticism about European energy supplies if Brussels introduces a complete ban on Russian energy.

According to analysts, the rate of the Russian currency is affected by the fact that companies are preparing for tax payments on May 25-27, which may create an excess dollar supply. Russia's unusually strong balance of payments also plays a role.

In addition, the indicators are affected by various restrictions on the capital control introduced by the Russian Central Bank. At crude near $110/bbl, the Russian ruble’s fair econometric exchange rate to the U.S. dollar sits near 52/$.