By Maximilian Hess
We are not witnessing the dawn of a new post-dollar world.
Western sanctions imposed on Russia in late February saw the rouble plummet to unprecedented lows, prompting Russia’s Central Bank to more than double interest rates to 20 percent and setting off fears Russia’s economy could collapse. Since then, the rouble has largely recovered, at least officially. Russia’s Central Bank even announced a link between the rouble and gold – and on April 8 it cut back the baseline interest rate from 20 percent to 17 percent.
Combined with discussions of a rouble-Indian rupee trade arrangement, and Russia’s expanded currency surplus on the back of high hydrocarbons prices, this has been trumpeted by Russian propaganda as evidence Moscow is not only withstanding the West’s economic war, but as the potential end of dollar dominance.
Moscow is not alone in making this argument and this line of thinking is not limited to its echo chambers on the far right and far left, either. Similar positions have been floated in the opinion pages of The Wall Street Journal and Australia’s Financial Review – even the renowned Credit Suisse analyst Zoltan Pozsar, in conversation with Bloomberg, argued that this may be a turning point to a new post-dollar world.
However, in reality, the current “strength” of the rouble and its supposed gold peg represent nothing but the weakness of Russia’s economy and its fiscal management in the face of Western sanctions.
First, it must be understood that the rouble’s strength, while not wholly illusory, is the result of an extreme decrease in trading levels, and the Russian government’s own capital controls. The rouble is not quite an inconvertible currency yet – Russia’s banks are not yet under a blanket ban – but almost all trading takes place on Russia’s MOEX exchange. Exporters are required to sell their foreign currency to the state.
Russia’s currency controls also mean that the rouble-gold peg is no return to the gold standard. A gold standard means that one can freely exchange a paper currency for gold. Russia’s gold peg, inversely, was to force Russian gold producers and sellers to accept a fixed amount of paper money for their gold production.
Therefore, the Russian “gold peg” should be seen as akin to the fixed price for cigars in Cuba rather than as any serious threat to the international financial order. Russia’s central bank abandoned the policy on April 7 anyway, though this has received considerably less attention from dollar doom-mongers and Kremlin propagandists.
In contrast to the fevered end-of-dollar-dominance commentary, no notable foreign investors have gone long the rouble, as the Kremlin’s own currency controls prevent them from repatriating gains. In countries neighbouring Russia, which have seen an influx of Moscow and Saint Petersburg’s intelligentsia in the aftermath of the war, the real rouble rate available at most cash counters is far lower than the official rate.
At home, however, Russia has slightly eased currency convertibility. Russians can now transfer $10,000 abroad per month, though this is of course far too little to fill a single superyacht’s tank.
In effect, what is happening is that the Russian central bank is underwriting an artificial exchange rate for Russians, but particularly for Russian importers. By doing so, the Russian state is losing hard currency on each transaction, which is why Russia’s foreign exchange reserves declined by $39bn in March even as its central bank was barred by sanctions from intervening directly in rouble markets.
The Russian state has to fulfil this role as demand for the rouble from abroad remains negligible. The vast majority of Chinese-Russian trade is not on rouble terms, and even the minority that is carried out in roubles is typically linked to the dollar, for example via international oil and gas prices, meaning that there is little financialisation of the rouble in Chinese banks. Russian firms, too, have only a thin history of issuing yuan debt. Talks with India could bolster demand somewhat, but Delhi doesn’t offer the kind of exports Russia needs, particularly in the aftermath of Western technology sanctions.
This is why President Vladimir Putin has been trying to get European countries to pay for their natural gas imports in roubles. Many have been bewildered by the demand and thought it unlikely to have a major impact, pointing out that it simply means that Western firms would be exchanging their dollars and Euros for roubles, rather than Russian exporters, where the state dominates.
However, it is precisely who the transaction is with that matters – creating demand for the Russian rouble from Western firms would not only support the rouble’s continued convertibility by keeping a hole in the sanctions regime open, but would also shift the currency risk off of the Russian state somewhat.
Yet as Putin’s invasion of Ukraine continues to unleash new horrors, these gaps in the sanctions regime may well close – discussions about how the West should tighten its sanctions are continuing on a daily basis. If the rouble becomes completely inconvertible, Russia could be forced into a dual-currency system with a convertible and non-convertible version, as seen in Cuba or China with its domestic and offshore yuan (CNY and CNH), respectively.
For now, Russia can sustain its illusion of rouble strength thanks to a strong current account surplus meaning it has hard currency to spend, even as it faces looming default and has seen most of its assets frozen. This will no longer be the case if Europe ultimately does agree to an oil and gas embargo.
The Russian state may also grow tired of effectively subsidising its importers and those seeking to take cash abroad, given Putin’s turn to autarky and lashing out against fifth columnists. The risks of a further rouble collapse are very real. Russia’s threat to dollar hegemony, however, remains a fantasy.
Maximilian Hess is a Fellow at the Foreign Policy Research Institute and a Political Risk consultant based in London