Friday, April 1, 2022

How is Russia supporting the ruble?

In the graph above, we see the FX price of a ruble fall and then rise. 

To explain this, think of shifts in the demand and supply of rubles in the market for foreign exchange.  
  • Supply of rubles:  Russian importers and investors sell rubles to buy foreign currencies to buy foreign imports or invest abroad.
  • Demand for rubles:  Foreign importers and investors sell foreign currencies to buy rubles to buy Russian exports or invest in Russia.  
Anything that increases demand for rubles or decreases supply of rubles will appreciate the ruble (push the price back up): 
  •  First, the Russian central bank raised interest rates on February 28th from 9.5% to 20%. 
    • To earn 20% in Russian savings accounts, investors sell foreign currency to buy rubles, an increase in demand for rubles.
  •  Second, Russia imposed a 30% fee on purchases of foreign exchange (since lowered to 12%). 
    • Such a "tax" on selling rubles to buy foreign currency reduces the supply of rubles.  
  •  Third, exporters—such as those selling oil and gas—were mandated to convert 80% of their foreign-exchange earnings to roubles.  
    • Exporters had to sell foreign exchange and buy rubles, an increase in demand for rubles.  

No comments:

Post a Comment