Conventional wisdom on why the ruble has rallied is simply wrong. Let's discuss the theories and what is really happening...
When Russia invaded Ukraine on February 24, it took 84 rubles to buy 1 US dollar.
On March 7, it took 131.2 rubles to buy 1 US dollar.
That's a 36% decline in the rubble vs the US dollar.
The ruble is now back where it started on February 24.
Ironically, your sarcasm is actually correct!— Mike "Mish" Shedlock (@MishGEA) March 30, 2022
There is indeed nothing to this. And it is not related to Ruble rally.
Putin and Italy's Prime Minister, Mario Draghi, have discussed payments for gas in Russian rubles.
What's the Difference?
People just don't get this— Mike "Mish" Shedlock (@MishGEA) March 30, 2022
Ruble rally totally unrelated to demand payment for oil and gas in Rubles.
Rather, it's other things Russia is doing to avoid sanctions and internally force demand for rubles. https://t.co/kqv4GsEHVk
Weiner correctly notes the imagination.
Oil for Rubles, Who Cares?
Case 1: To get rubles to buy oil, Europe sells Euros to Russia central bank. Europe immediately send the rubles it received straight back to Russia to pay for the the oil. Russia central bank accumulates euros.
Case 2: Russia sells oil for euros. Russia central bank accumulates the exact same number of Euros as in case number one.
The currency exchange takes place in seconds. Europe does not have to hold rubles to buy oil.
This is just more of the "oil priced in euros" stupidity. No one will have to hold rubles to buy Russian oil. Or gas. The Ruble does not become a reserve currency.
There is perhaps some small psychological impact, but there is no real impact unless Europe actually held ruble reserves, and here's a hint: Europe wouldn't.
What About European Sanctions?
Europe has no real sanctions.— Mike "Mish" Shedlock (@MishGEA) March 30, 2022
Look at the exclusion list.
Oil, NG, food, fertilizer, all the metals it needs.
Hells bells, all French companies are still doing business in Russia.
With euros, Russia can buy US parts from China.
Who is the winner here? https://t.co/cwq2GoYsMp
As a result of our unprecedented sanctions, the ruble was almost immediately reduced to rubble.— President Biden (@POTUS) March 26, 2022
The Russian economy is on track to be cut in half.
It was ranked the 11th biggest economy in the world before this invasion — and soon, it will not even rank among the top 20.
Biden says "Ruble reduced to Rubble because of sanctions."
It took another three days from that Tweet for the ruble to regain all of its losses. Why?
In three words: Sanctions Don't Work. Here are some examples.
Parallel Credit Card Payment System
The Wall Street Journal reports Russia Built Parallel Payments System That Escaped Western Sanctions
Visa and Mastercard pulled the plug on Russia's credit cards. But following the 2014 war in which Visa and Mastercard did the same, Russia took measures to not let that happen again.
Instead, Putin implemented a National Payment Card System—known by its Russian initials NSPK. Visa and Mastercard went along with it.
In 2015 Russia then forced the use of Mir cards based on NSPK.
Those cards do not use the US payment system.
One irony is that instead of Visa and Mastercard getting the fees, Russia's central bank collected 8.2 billion rubles in net profit, or about $94 million at current exchange rates.
Russia actually profited from Visa and Mastercard sanctions.
Price of Oil and Natural Gas
The price of oil and natural soared after the invasion.
The US banned Russian oil, and that influenced the price. But trading never totally stopped. Instead, Russia traded oil to China for a discount, but at a price higher than the pre-war price.
In the hoot of the “We are completely against any kind of blackmailing,” Germany’s Finance Minister Christian Lindner told CNBC Monday.
Putin offering oil sales in rubles only, and backing the currency in gold will have a bigger impact on the US dollar than all of the worlds sanctions.— Don (@Donnydad) March 29, 2022
So only accept payment for oil and gas in rubles— TheHappyHawaiian (@ThHappyHawaiian) March 25, 2022
And offer to buy gold in rubles@LukeGromen having a good day with his frequent predictions of forcing oil sales to effectively be made in gold
Not at the crazy ratios he’s thrown out but happening nonetheless, this is big! https://t.co/L94R56xPYj
Those Tweets are nonsense. There is no gold-backed ruble.
Russia is offering to buy gold at a discount. It certainly is not selling gold at a discounts.
The amount of total nonsense generated over those Tweets and payment in rubles is staggering.
What Does Payment in Rubles Really Mean?
Please consider What Would Paying for Natural Gas in Rubles Mean?
The article quotes Eswar Prasad, professor of trade policy at Cornell University and a former official at the International Monetary Fund.
In theory, requiring ruble payments could support demand for the currency and its exchange rate. But not by much, Prasad says. As it stands, euros and dollars are already being used to purchase rubles when Gazprom exchanges its foreign earnings.
Note that last sentence. This is what Weiner implied in his Tweet above.
What Russia actually did is force exporters to trade 80% of its euros and dollars into rubles at a discount. That creates a huge artificial demand for rubles.
Currency and Stock Market Restrictions
Russia also restricted currency trades. People who wanted out of the ruble could not get out.
In addition, Russia Banned Foreigners From Selling Russia Stocks.
Russia's Real Power
Russia's real power is to shut off the supply of natural gas, oil, fertilizer, and grain.
Russia and Ukraine account for 30% of the world’s wheat exports, 17% of corn, 32% of barley & 75% of sunflower seed oil. Russia also exports about 15% of the world's fertilizer.— Jack Nicas (@jacknicas) March 20, 2022
Now all of that food and fertilizer are stuck.
My story on a looming crisis:https://t.co/mIuWPkqDD9
List of Companies Still Doing Business in Russia
The list of US companies still doing business in Russia is huge. We hear about meaningless reactions.
France would not go along, at all. "We are not at war with Russia," said French President Emanuel Macron.
For discussion, please see After McDonald’s Closed 847 Restaurants in Russia, Russian Government Renamed Them "Uncle Vanya"
Russia seized 847 McDonald's. Who did that hurt?
Eight Reasons For Ruble Rebound
Russia escaped Visa and Mastercard
Russia still trades oil and gas with Europe
Russia halted currency trades
Russia enacted stock market restrictions
Of Russian exporters, Russia demanded 80% of euros and dollars be traded for rubles.
Russia threatens to stop exporting key commodities including aluminum, natural gas, fertilizer, rare earth minerals, etc., driving up prices and the need to stockpile.
Sanctions cannot take away Russia's natural resources.
The Fed can print dollars, it cannot print commodities. Likewise, the ECB can print euros, it cannot print commodities
Two False Reasons People Key On
Russia demands payment in rubles
I am surprised Robin Brooks messes this up so badly.
An embargo of Russian energy would see Russia's GDP completely collapse. Our baseline forecast has GDP fall -30% by end-2022 and does NOT yet put a 100% weight on an energy stop. This number would be MUCH worse in the event of an embargo, making war harder to sustain for Putin... pic.twitter.com/6ZMJceyjH9— Robin Brooks (@RobinBrooksIIF) March 26, 2022
Economists saying that a complete EU embargo of Russian oil would crush Russia’s economy but not the EU’s economy (followed shortly thereafter by the US & global economies) are missing the forest for the trees IMO. https://t.co/JS1N3RJDZG— Luke Gromen (@LukeGromen) March 27, 2022
Luke Gromen gets that aspect correct, Robin Brooks doesn't.
Twelve and Three-Word Summations
A twelve-word synopsis of the above is Misguided Souls Still Do Not Understand This Simple Truth: Sanctions Don't Work
The last three of those twelve words emphasize the key point.
China is the big winner in global sanction policy.
There is one more key aspect: Weaponizing the US dollar has totally backfired on the US. War views aside, we should all cheer that aspect. Yet, misguided souls want to escalate what is proven not to work.
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