Russia Ruble vs. US Dollar: Why Is the Russian Currency Stronger Despite Ukraine War?

Russia's currency, the ruble, continues to rise against the U.S. dollar, making it the best-performing currency in the world this year despite the war on Ukraine inviting Western sanctions targeting Moscow's financial system.

The ruble has mounted a strong turnaround only three months after its value fell to less than a U.S. penny amid the toughest economic sanctions imposed on a country in modern history. Since January, the Russian currency has already jumped 40% against the U.S. dollar.

Russian Ruble vs. U.S. Dollar

A professor of capital formation and growth at the Harvard Kennedy School, Jeffrey Frankel, said that this was an "unusual situation." Typically, a country that is facing international sanctions and a major military conflict would see investors fleeing and a steady outflow of capital, causing its currency to drop.

However, Russia's unusually aggressive measures to keep money from leaving the country, in combination with a dramatic rise in fossil-fuel prices, are working to create demand for rubles and pushing up its value. The ruble's resiliency means that Moscow is partly insulated from the punishing economic penalties, a protection that is uncertain in how long it would last, as per CBS News.

The main reason that the Russian currency was able to make a turnaround is soaring commodity prices. After Moscow ordered the invasion of Ukraine on Feb. 24, already high oil and natural gas prices rose even further up.

The lead emerging markets economist at Oxford Economics, Tatiana Orlova, said, "Commodity prices are currently sky-high, and even though there is a drop in the volume of Russian exports due to embargoes and sanctioning, the increase in commodity prices more than compensates for these drops."

According to the New York Times, on Tuesday, the ruble traded at its strongest level against the U.S. dollar since June 2015. It has gained roughly 35% so far this year, beating every other major international currency, and has more than doubled its post-invasion low.

Russia's Economy

Despite Russia's economy holding up much better than many predicted, the outlook is gloomy, with double-digit inflation and most economists predicting a deep recession in the near future. However, capital controls imposed by its central bank, including those that forced exporters to exchange some of their earnings into rubles, have increased demand for the currency.

The ruble crashed to its weakest-ever level against the U.S. dollar in late February following the beginning of the war with Ukraine. In response, Russia's central bank more than doubled interest rates, up to 20%, as part of its attempt to stop the outflow of rubles from the economy.

Since then, some restrictions have been loosened and rates have been cut back to 9.5%, where they were set before the invasion. The situation comes as, in the United States, President Joe Biden's administration has cut off Russian energy imports, sanctioned Russian President Vladimir Putin and dozens of his allies, and targeted various aspects of the Russian economy.

Earlier this month, the European Union formally adopted an embargo on most Russian oil imports by the end of the year. However, it kept a temporary exemption for imports delivered by pipeline to European countries with a "particular pipeline dependency, The Hill reported.