Two unexpected outcomes of the Russia-Ukraine war have stunned pundits. One, how a hoody-clad comedian held an entire country’s nerve to forestall the fearsome Russian war machine that was expected to run over his nation in less than a week. And two, how the rouble bounced back from a ruinous 150 to the dollar to a spectacularly healthy 68 to the dollar in less than two months!
Since I am very wooden with comedy but do understand a whiff of geoeconomics, I shall stick to the rouble. It’s the world’s second-oldest currency (after the sterling), dating back to the 14th century. It floats freely, and before the war, it was the 17th most traded currency in 2019. But its death was foretold when western nations, led by America, slapped crippling sanctions on Russia for invading Ukraine. Over $300 bn of Russian reserves were frozen. With a dramatic flourish, Russian banks were removed from SWIFT, effectively outlawing them from the global payments architecture. The rouble tanked to nearly 150 to the dollar, and its obituary was written.
How Dollars Continued to Flow to Russia
Of course, even as the rouble was gasping, a couple of tiny but critical vials of oxygen were keeping it alive – vials of natural gas and oil, which Russia supplied in humongous quantities to Europe, China, India, Canada, Japan, and South Korea, among several others. Nobody could risk switching off this energy lifeline abruptly, so dollars continued to flow to Russia, but the life force was ebbing. European countries bravely began cutting and substituting Russian imports in the face of spiking prices. Even Germany, which had promised to kill Russian supplies by the end of 2022, began to threaten a shut-off much earlier. What was once thought to be recklessly impossible was coming to pass. The rouble should have crashed to 200 to the dollar, right?
Wrong! The rouble has done a mind-numbing turnaround to appreciate to under 70 per dollar, becoming the best-performing global currency through March and April. The only word I can use to describe this phenomenon must be borrowed from Hindi – ‘anhonee’, which means that which should never have happened.
How did Russia and its mercurial, muscular leader, Vladimir Putin, pull it off?
When the first flurry of sanctions felled the rouble in early 2022, Russia responded with classic counterblows. It yanked up the interest rate to 20% and clamped capital controls to effectively ‘unfloat’ the rouble and quarantine dollars within the country. But those moves, which were standard defence tactics, surprised nobody, and while they may have broken the rouble’s free fall, they could scarcely explain its soaring about-turn.
Putin's Smart Thinking
Here is where Putin flexed his maverick strongman muscle. He made two risky, bold, unconventional bets on the rouble. First, Russia’s central bank announced in March that it would buy gold at a fixed price of 5,000 roubles per gram until June 30. That was smart thinking because it effectively pegged the rouble against all major world currencies that are firmly quoted against gold. And remember, Russia was strong in gold. It produces 10% of the yellow metal mined every year in the world.
It also held 2,300 metric tonnes of gold in January 2022, the fifth-largest hoard globally. This reassured rouble’s holders that its catastrophic, uncontrolled decline was over, because if gold was not going into a free fall (why would it?), so wouldn’t the rouble.
Next, Russia cleverly planted a ‘rumour’ in world media that it was planning to re-adopt the gold standard after almost a century of having abandoned it. Putin said so, and his Security Council Secretary, Patrushev, reiterated it. But Putin kept the pot boiling when his central bank governor denied that there was any such move afoot. This ‘managed’ good-cop-bad-cop act did the trick as the rouble recovered much of its lost value, without any tangible commitment to moving towards the gold standard. Lo and behold, within two weeks, Russia pulled back from its commitment to buy a gram of gold at a fixed price of 5,000 roubles. Putin was back to buying gold at negotiated prices.
Putin’s second gamble on the rouble was even more daring, and frankly, how that drama will end is yet to be figured out. He threatened to rescind all dollar contracts, instructing his gas/oil buyers to pay him in roubles. He was betting that the coercive strength of his ‘indispensable’ gas/oil supplies was mightier than the American dollar, the world’s most robust reserve currency and store of value. He was betting on qualified but certain support from China and India in this (mis)adventure – especially from China, which has always chafed at the global monopoly of American dollars.
To put the bite in his bark, he banned energy exports to Poland and Bulgaria when they refused to pay him in roubles. While the big western powers are staring him down on this dare, others are more circumspect. Four European countries are thought to have agreed to pay in roubles, while 10 large corporations are understood to have signed up with Gasprombank.
This Is Not an Ode to Russia
So, as of now, we are witnessing an uneasy ‘balance of terror’ in this commercial conflict. Will the western powers succeed in killing all gas/oil supplies from Russia, effectively neutralising Putin’s ‘rouble ruse’? Or will they capitulate if gas prices leap, inflation spikes viciously, and street protests escalate as people are unable to heat homes or cook meals? The proverbial cliché, “only time will tell”, has a chilling, uncharted ring to it in this context.
Now, you would ask, why sing this ode to Russia at a moment when the country has horrified the world with such violence? No, sir, I don’t have an iota of admiration for Putin or his country at this point in history. Instead, I am aiming this missive at India’s pusillanimous policymakers who are petrified of exposing India’s macroeconomy to dollar markets.
In an earlier article, I had suggested three policy moves that could get $50 bn into our country, immediately strengthening the rupee and lowering bond yields. But our policymakers have pushed back, cowering at the thought of “importing contagion from overseas”.
I just wanted to show them how Russia has tamed foreign exchange vicissitudes. And if Russia’s weak economy can do that, in the face of debilitating sanctions, then imagine how deftly India could handle any unexpected outcome given our strong dollar reserves and generally prudent macroeconomic policies.
All we need is a bit of courage and savvy. Alas, bureaucracies can’t even spell those words!