The fall and rise of the Russian ruble

The US dollar was valued this week at about 80 Russian rubles, roughly the same exchange rate in effect before Russia invaded Ukraine on 24 February Western sanctions had initially ravaged the Russian currency—but it has bounced back.

How did that happen? And what's holding up additional economic penalties against Russia? Also, given the stickiness of sanctions, will they ever be lifted?

Those are some of the questions that came up in my conversation this week with FP columnist Adam Tooze on the podcast we co-host, Ones and Tooze.

What follows is a transcript of the interview, edited for clarity and length. For the entire conversation, subscribe to Ones and Tooze on your preferred podcast app.

Cameron Abadi: The ruble is worth as much now as it was before the war. One of the explicit goals of sanctions was to do damage to Russia's currency. Does that mean the sanctions have failed?

Adam Tooze: You might think so, but the impression is deceptive. The Russians understand that the aim of the game was to hit their currency, and we did that through the central bank sanctions, which were the really dramatic aspect of the new sanctions campaign over the first weekend of the war. And so they have targeted restoring the value of the currency as a major objective. And they are completely manipulating the market for the Russian currency, insofar as they control it at home. They are restricting the way in which foreigners who've invested in Russia—or anyone else for that matter—can sell rubles.

And on the other hand, they are creating artificial sources of demand for the ruble because ultimately it's the balance between the demand and supply that determines the value of the currency. And so what they're doing, for instance, is requiring the Europeans increasingly through direct or indirect means to pay for Russian gas in rubles. They are requiring Russian exporters who are still able to earn foreign currency to exchange that for rubles; up to 80 percent of their export earnings have to go into rubles. And every time you do that, you create demand for the ruble. And broadly speaking, Russia is running a giant trade surplus currently, and that would be the sort of economic position from which you would expect the currency to appreciate.

So they're exploiting all of these tendencies to push the currency back to where it was before. However, this doesn't mean the same thing because there's no free exchange. And if there were a free exchange, you would expect its value to fall. The sorts of signs we have of the black market and the ruble suggest that its actual worth is considerably less—a fraction, maybe. Perhaps as little as half of the price that you get for it in Moscow right now. And this is propaganda in a sense—psychological warfare for the home front, maintaining morale. But that has real effects because our intention in dumping the ruble was to trigger bank panics, right? The aim of the game was to provoke chaos in the Russian financial system. And insofar as they maintain the illusion of stability, the stability is real. The fundamental paradox about banks is that they are illusory but stable so long as everyone buys into the promise that the money is there and could be had if you needed it. And so maintaining the veneer of stability has very real effects.

CA: The big sanctions still on the table are European energy sanctions, and it's clear that Germany is the holdup. The public debate there has come down to a fight over just how much damage an energy embargo would do on Germany. Some economists have said the damage would be manageable. But the German government has been saying that it would be catastrophic: mass unemployment, the collapse of entire industries. German Chancellor Olaf Scholz has even taken economists to task for the audacity of using mathematical models to make predictions. Is this just a kind of bullying from the German government on economists, or is there substance to the disagreement?

AT: Yeah, if it weren't such a serious issue and so morally serious, one would simply say it's fascinating, this debate. Because of course economists have to use models. I mean, that's what they do. And there are, of course, issues with the models, because models always have a purpose, right? They're not just simply descriptions of the world. There's no such thing. They're always designed to answer certain questions. And the two basic sets of models used in this debate—neither of them, really, have a way of capturing what's going on.

On the one hand, there's the model that is designed to measure the so-called gains from trade. And then they use that model to say, well, if you lost a certain element of trade, how much would you lose? They tweaked the model a little bit and came up with a loss of GDP of about 3 percent, which is significant but not as bad as that during the Covid-19 pandemic. And in the other camp, you have a bunch of economists associated with the German trade union movement, and the model they're pressing into service is a regular business cycle model. It yields the outcome that says it would do damage to the German economy up to about 6 percent of GDP in the case of a huge surge in gas prices, which would be tantamount to ending the gas supply immediately. 6 percent of GDP is worse than Covid-19, and it's really a very dramatic shock to the German economy, you'd have to say.

But what worries the politicians, of course, is not really so much whether it's 3 percent or 6 percent of GDP but whether people will have jobs to go to. And that's the position that the chancellor and many of his advisors are coming from—that we simply don't know what happens to the German economy if we take a major part of its energy supply away. And this is the incommensurability. And it's incredibly difficult to resolve.

There is no credible economic model that tells you it will be a catastrophe. That talk is exaggerated. But there are very good reasons to think it would be a big blow, say, for the German chemicals industry and associated branches. They make up 3 percent of German GDP. So assume that you then had a huge knock-on effect in associated industries—that would get you to about 6 percent. That's probably the kind of measure. And a 6 percent GDP fall is worse than the 2008 financial crisis in Germany. It would be very big, and it would be a hugely consequential decision to take on the basis of a foreign-policy commitment. And that's why they're hesitating over it.

CA: The German government is also claiming that Germany's payments for Russian energy are not fueling the war effort because, they say, the Russian government does not have access to the payments as a result of the central bank sanctions. I haven't seen that point made anywhere else. Is Berlin bending the truth here a bit for public consumption?

AT: I do find this a little self-serving. I mean, it is true that the Russian central bank is sanctioned, but it's also true that Gazprombank was not sanctioned. And so that's how the gas is being paid for, and it's being paid for at an astonishing rate. As much as up to a billion dollars a day appears to be flowing toward Russia, and that money flows into the Russian financial system, around the central bank to a degree, and helps support the Russian financial system. And because it gets flipped into rubles, it helps to support the currency in particular.

What is true, however, is that whether the Russians have the funds or not, currently, they're not able to buy the tech components they would want to support their war effort. There's a separate set of sanctions directed toward precisely this issue of preventing Russia from supporting its war effort. After all, Russia's economic ship is not so tight that they buy bits for the war when they get the money from their oil and gas revenues. These are two separate things. The revenue is still going to the Russians for the gas. But the reason why the Russians can't buy semiconductors is that Taiwan Semiconductor Manufacturing Co. won't deliver them anymore. And the reason why they can't continue domestic production is that Mikron, Russia's own leading semiconductor manufacturer, is also being sanctioned.

We're in a kind of perverse situation in which Russia runs a huge trade surplus. They give us their oil and gas. They give us their good stuff. We give them paper claims. And right now we're denying them the right to exercise the purchasing power that would go with those paper claims. It's very difficult to see that situation sustaining for any prolonged period of time because either they'll stop delivering the gas, which may be what the German political class is angling for, because it would be a lot easier to deal with if the Russians turned the taps off. Or, in due course, we are going to allow the Russians to spend these accumulated dollars and euros. And at that point they would, of course, derive an immediate benefit from the purchasing power they piled up during this period.

CA: It's interesting how governments can hide behind some of the technicalities here in making these arguments because it's all hard to follow.

AT: And they're genuinely obscure—it's not altogether obvious how the money flows right now, and that's for good reason. There are people who have no interest in making it clear how their money flows. But it's a self-serving argument, there's no doubt. If you wanted to do the Russian economy and Vladimir Putin's regime harm, you would stop buying the stuff. And you're not doing it because you consider the damage to the German economy so grievous that it doesn't make sense as a political calculation.

CA: We've talked a lot about whether the sanctions are severe enough. But do you think the West needs to be talking more about how and under what conditions sanctions might be lifted? Has the West backed itself into a corner by rendering sanctions unusable as bargaining chips in talks with Russia?

AT: I was on a call recently with folks from the Quincy Institute who were making this point—that once the US Congress gets its teeth into sanctions, it just doesn't let go of them. But there's going to be a reality check when it comes to Russia and notably the central bank side of this. It's very difficult to understand how a world would work in which you can take the best part of $500 billion worth of legitimately acquired claims on dollars and euros out of circulation. I mean, that will be a staggering thing. So I would think that would be very close to the top of the agenda, the unfreezing of Russia's central bank assets. If that doesn't happen, it will be truly monumental in its consequences.

And the other thing to say is that for all of the killing, for all of the egregious breaches of international law and the horrors that we're seeing, we are still buying Russian gas. So, you know, before we start talking about unwinding sanctions, let's just recognize the fact that the most important commodity flow has just not been interrupted so far. We haven't done that yet. When we do, I think the stakes really go up.

CA: If we're not sure about what the effects of the sanctions exactly are, do you think they're best understood as a symbolic exercise? Do the sanctions exist primarily to keep the sanctioners united and mark out a common enemy?

AT: I think that's absolutely crucial because if you go the other route and say, "What are they for?" in an instrumental sense, you rapidly run into a brick wall. It's not obvious from that point of view. So I agree. I think acting together, that's one dimension of this—being seen to act together. The other is credibility. I mean, we said we were going to do this. And so now we have to do it.

And I think there's another element to this, which is there's almost a populist element to the sanctions. I'm haunted by that kind of cheer that rang through to the rafters of Congress during President Joe Biden's State of the Union speech, when he said that we're going to go after the oligarchs, we're going to go after their yachts, we're going to go after their villas. I mean, there's a real kind of vindictive pleasure in looting the assets of other people, rich people. I saw this incredible thing on Twitter that was like, "The climate case for seizing oligarchs' yachts." No doubt taking some of the Russian yachts out of circulation contributes to reducing leisure carbon dioxide emissions. I mean, you could then ask, of course, about the private jets and maybe the private space exploration of oligarchs in the West.

But you take my point that there is indeed a kind of closing of the ranks in the West around this issue, which isn't explicable entirely in terms of effects we aim to achieve either in changing Moscow's mind or frankly materially aiding the Ukrainians, for whom many of these sanctions measures come far too late.

Cameron Abadi is a deputy editor at Foreign Policy. Twitter: @CameronAbadi

Disclaimer: This article first appeared on Foreign Policy, and is published by special syndication arrangement.