How Putin Revived the Russian Economy

a few weeks ago we did a blog on why the Russian economy was collapsing because at the time things looked pretty bad for Putin thanks to unprecedented western sanctions the ruble being down 60 percent and various private companies voluntarily pulling out of Russia however, in the last week or so the prospects for the Russian economy have improved significantly the ruble has recovered and multilateral sanctions on Russian energy exports which are currently bankrolling Putin's invasion look unlikely so in this blog we're going to try and do our best to explain how the Russian economy recovered whether the ruble will continue to rise and what the west can do about it before we get into the blog a quick disclaimer the unprecedented sanctions imposed on Russia by the west and Putin's unprecedented response has taken us into uncharted territory so economists are still struggling to understand exactly what this means for the global economy and well we're not economists so don't take our word as gospel here that being said even if this blog isn't quite perfect we still thought this was an interesting and important topic so we wanted to go-ahead with-it disclaimers aside let's get into it when sanctions were first introduced in late February many analysts expected them to the Russian economy after all these sanctions were unprecedented they included freezing Russian central bank assets expelling Russian banks from swift and individual sanctions on Russian elites and Putin himself in fact in the first few weeks Russia's economy looked precariously close to collapse and the ruble did collapse to an all-time low of 140 per dollar and as such the Russian central bank was forced to more than double interest rates with Russia also closing their stock exchange indefinitely however in the past week or so, the Russian economy has recovered somewhat the ruble's value has recovered against the dollar by about 45 percent and is now trading at about 90 ruble per dollar and when Russia finally reopened their stock exchange on March 24th for a shortened trading session Russian stocks did surprisingly well 33 out of the 50 stocks which make up the Russian equity benchmark were available and well they all did surprisingly well with the 33-stock index up 11 on the first day now this stock market rally should be taken with a massive pinch of salt this 11 jump only amounts to a partial recovery from the 50 drop that Russian stocks have suffered since December and the rise was driven by Russian oil companies with shares in gas giant Gazprom jumping around 20 percent and other oil majors up by 19 this was sort of to be expected though as you probably know energy companies are currently exempt from sanctions so you'd expect their shares to rise given the oil and gas prices are higher than average and higher than when the market's closed in fact brent crude is trading at about 110 dollars per barrel at the moment which is about twice the average price for 2020 and 21 and the Dutch TTF futures the benchmark for European natural gas are at about 100 euros per megawatt-hour about four times their previous average so, Russia's rebound was clearly helped by energy companies which had been boosted by the global market Russia's stock rises were probably also helped by the fact that short selling was banned and foreign investors were unable to exit their positions during trade which is why the us accused Russia of artificially pushing up Russian shares but even if the stock market can be explained away how come the ruble has recovered so well well, the interest rate hike from 9.5 to 20 percent probably helped as did the fact that Russia has literally banned foreign investors from selling their Russian investments but perhaps the single most important factor in the ruble's recovery has been energy revenues originally Putin required all Russian exporters to convert 80 of their foreign exchange reserves into the ruble essentially this means that any Russian company exporting goods like oil gas or coal has to use 80 percent of the money they get to buy more rubles this increases demand for and therefore the value of the ruble and given that Europe were buying somewhere between 700 million and a billion dollars' worth of Russian energy exports every day late February and early march this means that some 560 to 800 million dollars' worth of foreign currency was being used every single day to prop up the ruble but it doesn't stop there and Putin has taken it a step further with quote unfriendly countries i.e., basically, all of Europe being told that if they want to buy Russian gas they'll have to pay for it in rubles now at first glance, this seems counterintuitive you might reasonably think that given that most of Putin's foreign exchange reserves have been frozen and the ruble's economic collapse that he'd want foreign currency more then he wants the ruble but there are a couple of reasons why Putin might have decided to do this for starters it effectively means that not just 80 percent but 100 of Russian foreign currency inflows for gas and now being spent to prop up the ruble secondly even if Russia was receiving dollars and euros for its gas sanctions meant that Russia would have had to use complicated and inefficient systems of intermediary banks to actually, use that currency by telling European countries that they have to pay in rubles Putin essentially outsourced this process to his unfriendly neighbours so European countries now need to somehow get their hands on rubles even though their sanctions prohibit trade with most Russian bank which brings us on to the third reason for Putin requiring rubles it discourages further European sanctions because well the Europeans need Russian banks to give them rubles if they then want to be able to buy Russian gas somewhat predictably though European companies have come out and said that they won't do this and to be fair to them Putin's request would most likely constitute a breach of their contract that's because most of the long-term gas contracts between Gazprom and European energy companies are denominated in either euros or dollars, not rubles ultimately though the legality here is sort of irrelevant Putin has said that if he's not paid in rubles Russia will turn off the gas taps on March 31st so, what happens next well it looks unlikely that western countries will give in and agree to pay in rubles because well doing so would be an embarrassing humiliation it is possible that Putin's bluffing about turning off the taps after all that would mean losing out on the equivalent of about 400 million dollars' worth of gas sales every day that being said though there are signs that Putin is preparing for this sort of thing on Friday the Russian central bank announced that it would be buying gold for 5 000 rubles per gram from commercial Russian banks which would mean more gold to compensate fewer gas sales it's worth saying that gold is currently trading for about 6 000 rubles per gram but some Russian banks might be willing to pay a premium if they're struggling for liquidity.