A term popularized in 2010 by the Brazilian Minister Mantega, currency wars or also called competitive devaluation, is referred to countries that devalue their own currencies to have their exports cheaper in the global market and imports more expensive; thus, attracting international traders, increasing demand for domestic goods and services, and eventually decreasing the trade deficit. Currency war can be harmful to the global economy as it can possibly increase protectionism and trade barriers, and it can be harmful to the country’s economy as inflationary pressures might immerse if the country relies heavily on imports that became more expensive. Can we observe a currency war nowadays? Let’s see.
The ruble has grown throughout the past months reaching 7 years-high against the USD to the extent that Russian policymakers are taking quantitative easing measures to tame it to avoid expensive, less-competitive exports of the country which is already suffering from sanctions. The Russian Central bank cut the interest 3 times since the beginning of the war in Ukraine with the latest cut of 150 bps to reach 9.5% in June.
The main contributing factor to the strength of the currency is the sanctions imposed on Russia, as well as the energy purchases by the EU countries with the price of oil almost 60% higher than last year’s price; hence, Moscow is reaping record revenues despite the sanctions passed and is shown in the current account surplus of more than USD 100B, 3.5 times higher than that of last year. It is also worth mentioning that there are a great number of exemptions on oil imports for landlocked countries that have no other choice but take their energy from Russia at least in the meantime. A member of the Foreign Policy Research Institute has told the CNBC “Although Russia may be selling slightly less to the West right now, as the West moves to cut off reliance on Russia, they are still selling a ton at all-time high oil and gas prices. So, this is bringing in a big current account surplus”. Themos Fiotakis, head of Foreign Exchange Research at Barclays have also commented on the currency’s strength implying that the strength is not a result of a strong economy but rather due to several exogenous influences saying "Ruble strength is linked to a surplus in the overall balance of payments, which is much more driven by exogenous factors linked to sanctions, commodity prices and policy measures than by longer-term underlying macroeconomic trends and fundamentals," said Themos Fiotakis, head of FX research at Barclays. It is very uncertain and depends on how the geopolitics evolve and policy adjusts." He further commented on the sustainability of that strength stating that it is very uncertain and depends on how geopolitics evolve and policy adjusts." Russia’s domestic product growth rate recorded 3.5% YOY which is lower than the expected 3.7% growth rate and less than the previous 5% growth rate and the lowest since July 2021. Furtherly, since the war began, the poverty rate has doubled.
In conclusion, despite interest rate cuts and other actions meant to halt the ruble's rebound, rising prices for Russia's commodity exports and the decline in imports as consumer demand declines have created a surplus of foreign currency. Further tools to revive the economy, and narrow the difference between the ruble’s level in the market and the exchange rate available are needed amidst the tightened reins around the country by the sanctions.
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