INTRO: Eversince Russia invaded Ukraine, much of
the western world has bombarded them with restrictions, boycotts, and sanctions.
For example, the biggest companies in the world including Apple, Amazon, Adobe, Netflix,
and Disney have all stopped operations in Russia.
Similarly, many countries have stopped importing Russian oil, and some countries wont even
let Russian aircraft fly over them.
Not to mention, most Russian banks and accounts have been completely frozen.
The idea was that we could help Ukraine by hurting Russia economically and that an economic
crash would cause Russia to back out faster.
But, so far this doesn’t seem to be the case.
The Russian economy is indeed hurting, but the Russian Ruble is actually stronger than
ever.
And if you don’t believe me, just take a look at the charts.
Initially, the Ruble did crash 50% as soon as the sanctions were implemented, but since
then, Ruble has skyrocketed 150%.
This means that the Ruble is currently the strongest its been in 7 years.
Now, you might be thinking that this must be because the dollar is performing even worse
or something like that.
But, this isn’t the case either.
In fact, the dollar is the strongest its been in 20 years on a relative basis.
And this just makes it even more significant that the Russian Ruble is skyrocketing against
the dollar.
So, what in the world is happening with the Russian Ruble and why is it mooning despite
all the sanctions.
INEFFECTIVE SANCTIONS: One of the top reasons that the Ruble is doing
so well is because many of the sanctions imposed on Russia aren’t even that effective, especially
the energy sanctions.
You see, the European Union is way more dependent on Russian energy than they would like to
admit.
And though I’m sure many of them would like to ban Russian imports completely, this is
simply not realistic.
Here’s the thing, Russia is the world’s largest gas exporter and the second largest
oil exporter.
So, it’s not really possible to completely cut off Russian exports overnight.
If they did do this, it would be the countries that are importing oil that would collapse
first.
But, wait a minute, didn’t the EU implement a Russian oil embargo?
Well, the answer is yes, but there’s a lot of fine print and exceptions.
First of all, the goal is to ban most imports by the end of the year, not by tomorrow.
Also, certain countries like Slovenia and Hungary are partially or even completely exempt
from the embargo.
Such countries are not only extremely dependent on Russian exports, but more importantly,
they’re landlocked meaning that they can’t receive oil through the sea.
These countries primarily get their oil through pipelines directly from Russia, and as you
would guess, rebuilding such infrastructure would take several years if not well over
a decade.
And given that most western countries are already headed towards a recession, completely
uprooting their crude oil source is the last thing these countries want to do.
And given that oil prices are skyrocketing as well, energy exports have just become even
more profitable for Russia.
In fact, during the first 100 days of the war, it’s estimated that Russia pulled in
$60 billion worth of revenue from fossil fuel exports to the EU alone.
Also, let’s not forget that not every country is against Russia.
Most of us are constantly exposed to western media, so it seems like the entire world is
against Russia, but this isn’t true by any means.
Many countries actually support the war including Belarus, Cuba, Nicaragua, Venezuela, and Kyrgystan.
But, you don’t even have to support Russia to help them.
If you simply stay neutral and continue importing Russian oil, that itself is a massive benefit
for Russia.
And this is exactly what many countries have been doing, particularly China and India.
This countries have no financial reason to stop importing Russian energy.
In fact, their incentivized to import more.
You see, as western countries slowly step away from Russian energy, the price of Russian
energy decreases, and this gives countries like China and India the perfect oppurtunity
to buy for a discount and that’s exactly what they’ve been doing.
China has risen to be Russia’s top oil importer having bought $12.6 billion worth of oil since
the war started.
Meanwhile, India has transitioned from being an occasional buyer to being a consistent
buyer.
Before the war started, India imported well below 5 million barrels of oil from Russia
on a monthly basis, and many months were even 0.
But now, India is importing tens of millions of barrels worth of oil every month.
And as more time passes, I think its just even more likely that more countries adopt
such a policy.
It’s not that they support the war.
Rather, they’re simply gonna do what’s in their best interest.
And if Russia has the cheapest oil, then so be it.
SUPPLY & DEMAND: Aside from western sanctions being negated
by exemptions and neutral countries, the Ruble is also substantially benefitting from supply
and demand.
While we like to throw around a bunch of fancy terms like quantitive easing when describing
a country’s currency or economy, in the end, the currency’s strength just comes
down to supply and demand.
If demand outpaces supply, then the currency will gain dominance.
Conversely, if supply outpaces demand, then the currency will lose dominance.
Western countries were obviously trying to accomplish the latter by eliminating demand,
but this has sort of backfired.
As we just discussed, Russia is still able to find significant amounts of demand for
their oil which in turn means the Ruble is in high demand.
However, the supply of Rubles has gone down substantially because almost every western
company you can think of has left Russia.
So, Russians are no longer giving Rubles to foreign companies.
If you haven’t noticed yet, this means that Rubles are entering Russia but not leaving
Russia.
Russia has actually leaned into this by implementing a slew of different rules.
For example, Putin has declared that importing countries must pay for Russian oil and natural
gas using Rubles.
Similarly, Russian exporters are required to convert atleast half of their excess revenues
into Rubles.
These rules stretch further than just exports and imports as well.
For instance, Russia has banned foreign stock and bond holders from taking their dividend
payments out of Russia.
All of these policies have just further inflated the demand for the Ruble while also deflating
the supply of the Ruble.
And simple economics would tell you that this is extremely beneficial for the Ruble.
Not to mention, Russians themselves are extremely reluctant to let go of their Rubles because
they can earn extraordinary interest rates by just leaving it in the bank.
When the war started, Russia hiked interest rates all the way to 20%.
They have since decreased them to 10%, but as long as the currency itself is holding
strong, there’s very little reason to seek out investments or spend your money when you
can just earn 10% doing nothing.
Russia has actually started to lighten such monetary policies because they also don’t
want the Ruble to get too strong.
You see, if the Ruble continues to get stronger, exports from the country will become less
and less appealing, and that’s the last thing Russia wants right now.
So, ironically, the Ruble is starting to get so strong that even Russia is ok with a slight
cool down.
A GOLDEN CAGE: Listening to all of this, it might seem like
westerns sanctions were a massive fail, and from one perspective, they were.
After all, Russia is still making loads of money and their currency is stronger than
ever.
But, it’s not all sunshines and rainbows.
While Russia has plenty of money to spend, they can’t actually spend it.
Here’s the thing, while sanctions may not have been that efffective at stopping countries
from buying Russian products, they have been quite successful at preventing Russia from
buyign foreign products.
A great example of this is car sales.
Russia expects car sales to half by the end of the year.
Another example is semiconductors.
In fact, the supply of semiconductors has gotten so bad in Russia that they have started
to use dishwasher and refrigerator chips inside military equipment.
This isn’t that surprising when you consider that US technology exports to Russia have
decreased by 70% since the start of the war.
This is the same case telecommunications, lasers, avionics, and maritime technology
as well.
And while Russia may be able to put up a strong facade in the short term, it’s only a matter
of time until these internal shortages start destroying not just their economy but their
entire society.
But wait a minute, doesn’t everything get produced in China?
Why don’t Chinese companies just supply Russians with semiconductors and phones and
cars?
Not to mention, they could probably charge the Russians a premium for this right?
Well, they definitely could, but none of the big Chinese companies really want to do this.
This isn’t that say that these companies support Ukraine, but at the same time, helping
Russia isn’t in their best interest either.
Here’s the thing, these manufacturing companies have insanely large contracts with American
juggernauts like Apple and Nvidia.
And the last thing they want to do is jeopardize their contracts with these companies by selling
equipment to Russia.
It’s simply not worth the risk.
This isn’t to say that no one is helping Russia though.
Many smaller companies that don’t have relationships with western countries and companies are willing
to help Russia.
But, as you would guess, these are almost always second grade products.
So, the longer these sanctions go on, the more likely it is that Russia’s technology
will degrade.
Aside from facing an internal supply crisis, Russia is also facing a debt crisis.
Recently, Russia missed a bond interest payment, not because they couldn’t afford it but
because they couldn’t pay.
You see, the interest payments were supposed to be in Euros and Dollars, but Russia doesn’t
really have access to these currencies.
So, they tried paying with Rubles but this payment was blocked by international sanctions.
Considering this, missing the payment isn’t exactly Russia’s fault, but this will no
doubt discourage investors from buying Russian bonds which will just make it even harder
for Russia to get through this war.
So, while the Ruble is stronger than ever, the same cannot be said about the Russian
economy.
THE STATE OF RUSSIA: At the end of the day, Russia has played the
sanctions game as well as they can.
They’ve found new buyers for their oil, they’ve limited the outflow of Rubles, and
they’ve successfully stabilized the currency.
All of these efforts have kept Russian income rather consistent, but this isn’t to say
that Russia is winning the economic war.
While Russia has plenty of money to spend, they literally can’t spend it.
They can’t buy cars or phones or computers or really anything.
They’re forced to rely Chinese knockoffs that don’t have anything to lose by working
with them.
This hans’t become that big of a problem yet given that the sanctions have only been
in place for a few months.
But imagine what happens 5 years down the line.
What will everyday Russians do when they need a new car or a new computer.
Russia’s tech industry has already realized this, and that why tens of thousands of tech
workers have been fleeing the country.
And as these tech workers flee the country, it just becomes even less likely that Russia
is able to reproduce western technology by themselves.
And in today’s world where technology is basically an essential, Russia will only be
able to keep up this charade for so long until something gives.
So yes, the Russian Ruble is indeed the best performing currency of 2022, but in the end,
the entire point of currency is to act as a medium of exchange.
And given that the Ruble is failing at doing just that, it’s relative strength is all
but meaningful.
But that’s just what I think.
How much longer do you think Russia can keep up this charade?
Comment that down below.
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