Russia Devalues Ruble

Hi, welcome back to the channel. In today's episode I want to talk about something very strange that's happening in Russia, because Russia has a problem with the ruble, but possibly not the problem you're expecting. The ruble isn't collapsing, Russia is effectively trying to make it weaker. But when you understand why, it tells us something very interesting about the real state of the Russian economy, because normally a strong currency is something that countries celebrate. If your economy is booming, investors want to put money into your country, businesses are expanding, exports are performing well, and demand for your currency rises, then generally speaking the value of your currency will go up too. So a strong currency can be interpreted as a sign of economic strength. But Russia currently finds itself in the completely perverse situation where the ruble has become one of the strongest performing currencies in the world. And rather than celebrating, Russian companies, exporters, and the Russian government have now started complaining about it. And Moscow has actually been taking measures that put downward pressure on the ruble. So in this video, we're going to take a look at what's happened, why the ruble has become so strong, why that strength is actually damaging Russia, and why the exchange rate may be giving us a very misleading picture of what's happening inside the Russian economy. And there are plenty of graphs today because the charts tell this story particularly well. But before we go on any further today, could I ask you to subscribe if you haven't hit that subscribe button yet? It doesn't cost you anything, it's not really a subscription, it just indicates that you quite like videos like this. If you could also give this video a thumbs up, and if possible hit that funny little hype symbol, the sort of diamond shaped symbol, because that will help to boost this video with the algorithm, and put a smile on my face. So let's start with the ruble itself. If we look at the dollar against the ruble over the past five years, this is the exchange rate. This is one of the wildest currency charts you're ever likely to see. Before Russia invaded Ukraine, the dollar was trading for around 70 to 80 rubles. Then the invasion happened, sanctions were announced, Russian foreign reserves were frozen, and there was effectively a panic. The ruble crashed. At one point the ruble was trading at around 120 to one dollar. Russia then introduced capital controls, exporters were forced to convert foreign currency revenues, interest rates were dramatically increased to 20 percent, and the ruble recovered. Then over the following years it weakened again. By the end of 2024 and at the beginning of 2025, the dollar was once again trading for more than 100 rubles. But then something extraordinary happened. The ruble strengthened, and then it strengthened further, and even further. At various points during 2026, the dollar was trading in the low to mid-70s. So the ruble had effectively gone from more than 100 to around 75. That is a huge move for a major currency. And if you know absolutely nothing about Russia, and somebody simply showed you that chart, you might reasonably conclude, wow, things must be going really well in the Russian economy. But that's where things get really interesting, because the economic data really doesn't support that conclusion. Russia's economic growth slowed dramatically in 2025. The economy had been growing quickly during the early stages of the war because the Russian government was spending enormous amounts of money, military factories were running at full speed, workers were being recruited, wages were rising, government spending was pouring into the economy. But that wartime stimulus eventually started running into physical limitations. There aren't unlimited numbers of workers, there isn't unlimited manufacturing capability, and there isn't unlimited access to imported equipment, technology, and capital. Russia's GDP growth slowed to around 1% in 2025, and expectations for 2026 are modest. They're actually less than half of that. So this isn't a conventional economic boom producing a conventional currency boom. Something else is going on. And one of the biggest factors is imports. If you're a Russian company and you want to buy something from overseas, generally you need foreign currency to do that. You sell rubles and buy Chinese yuan, US dollars, euros, dirhams, or whatever currency that supplier is willing to accept for payment. That creates demand for foreign currencies and supply of rubles. But sanctions have made importing into Russia much more difficult. Some products simply aren't available. Other products have to travel through third parties and countries and the grey market, the parallel market, whatever you want to call it. Payments can be complicated. Banks are worried about secondary sanctions. Transactions are taking much longer. And Russia's domestic economy has slowed. All of that means demand for imports, and therefore demand for foreign currency, can be weaker than otherwise would have been expected. At the same time, Russia is still exporting enormous quantities of its commodities. Oil, gas, metals, fertilizer, grain, raw materials. So Russia has foreign currency coming in from exports without the same amount flowing back out through normal imports and capital movements. That imbalance supports the ruble. Then we have interest rates. Russia has been operating with extremely high interest rates as the central bank battles inflation. High interest rates make holding ruble assets relatively attractive and they also crush domestic demand for borrowing. Again that can reduce imports. Then you've got capital controls and restrictions on moving money around. And this is really important. The ruble is not trading in the same environment as the dollar, the euro or the British pound. Russia has been largely cut off from western financial systems. Capital flows are restricted. Western investors aren't freely moving billions in and out of Russian assets. The Moscow exchange doesn't even have normal dollar and euro trading in the way that it did before the sanctions. So when somebody says the ruble is strong, you have to ask, strong in what sort of market? Because this isn't necessarily millions of global investors looking at Russia and saying, we love the economy, let's buy Russian assets. In many ways the strength is a consequence of Russia becoming financially isolated. And now strength has become a problem. Let's imagine a Russian oil company sells 1 billion dollars worth of oil. If the exchange rate is 100 rubles to the dollar, that billion dollars translates into 100 billion rubles. But if the ruble strengthens to 75 to the dollar, which it has done, suddenly the same 1 billion translates only into 75 billion rubles. The company has sold exactly the same amount of oil. It's received exactly the same number of dollars. But measured in rubles, its revenue has actually fallen by 25%. And that matters enormously because Russian companies pay salaries in rubles. They incur domestic costs in rubles. They report their accounts in rubles. And most importantly from Vladimir Putin's perspective, they pay taxes in rubles. Russia sells a huge proportion of its commodities internationally, with prices effectively linked to US dollar. But the Russian government spends rubles. So a weaker ruble is actually very useful for the Kremlin. Every dollar of export revenue converts into more rubles when it's weak. A strong ruble does the opposite. And this is one of the problems that hammered Russia's budget in 2025. Oil and gas revenues dropped by around 24%. Russia ended up running a budget deficit of 5.6 trillion rubles. And the deficit was massively higher than originally planned. Obviously that wasn't purely because of the exchange rate. Oil prices, sanctions, discounts on Russian crude and rising expenditure all played a part. But the strong ruble made the situation far worse. And this is why Russia has increasingly found itself wanting something that sounds completely counterintuitive. A weaker ruble. The Russian finance ministry has been buying foreign currency in gold through its fiscal rule mechanism. When the government binds foreign currency, it effectively is selling rubles. And that puts downward pressure on the ruble. In June, the government dramatically increased these purchases, with planned purchases approaching 10 billion rubles per day. Now officially this mechanism is about managing excess oil revenues and rebuilding Russia's national wealth fund, which is partly true. But there's another very convenient consequence. It takes some of the upward pressure off the ruble. And Russian exporters would absolutely welcome that because for many of them the strong ruble has been very painful. A Russian grain exporter competing with an American, European or Brazilian exporter doesn't necessarily want the ruble getting stronger. A Russian steel producer definitely doesn't want it. A fertilizer company also wants a weak ruble. And oil companies are definitely happier with a weaker ruble. Because their products become relatively more expensive internationally, while their foreign earnings translate into fewer rubles at home. And here's another really interesting part of this whole story. Russia has spent years talking about de-dollarization. And to some extent that has happened. Trade between Russia and China is now overwhelmingly settled in Chinese Yuan, a little bit in rubles rather than dollars. India has also used alternative payment mechanisms for Russian oil, including United Arab Emirates Dirhams, Chinese Yuan and some rubles. But India is very reluctant to deal in rubles. But this doesn't mean the ruble has suddenly become a great international reserve currency. In fact it's quite the opposite. What we've ended up with is a fragmented payment system. China only wants to use the Yuan. India wants to use payments that work for Indian refiners and Indian banks, so not Russian rubles. Companies worry about sanctions, particularly if they're paying in rubles. Banks worry about being disconnected from Western finance. Payments are routed through different currencies and different jurisdictions, partly to protect the counterparts from sanctions. So Russia has reduced its dependence on the dollar, but it's also become much more dependent on a smaller group of trading partners, and their financial systems, and also their currencies. So that is a very different thing to what Russia was trying to achieve. And that's the final irony here. Russia cannot simply destroy the value of the ruble, because a weaker ruble has another consequence. Inflation. If the ruble falls sharply, imported products then become much more expensive. Imported components for Russian companies become much more expensive. Machinery rises in price. Chinese cars will actually go up in price rather than going down, which they have been doing over the last few years. Electronics overall will just cost more. Anything Russia has to acquire from outside the country becomes more expensive in ruble terms. And Russia has already spent years battling high inflation, so Moscow is effectively trapped between two undesirable outcomes. If the ruble is too strong, exporters suffer, and government revenues are squeezed, but they will pay less taxes. But if the ruble becomes too weak, inflation rises, and Russian consumers suffer. And that's why the exchange rate is such a fascinating indicator. And as I'm recording this, we've already seen some weakening. The dollar has moved back towards the mid-80s against the ruble, compared with the levels in the 70s we were seeing earlier in 2026. So some of that extreme strength has already unwound. But zoom out on that five-year graph and the bigger point remains. The ruble's value does not tell us what many people instinctively think it does. A strong ruble does not automatically mean a strong Russian economy. In this particular case, part of the ruble's strength has been created by sanctions, restricted capital flows, weak imports, extremely high interest rates, and Russia's unusual wartime economy structure. And perhaps the most revealing thing of all is that the Russian government itself doesn't want the currency to be this strong. Because when your currency becomes so strong that your exporters complain, your tax revenues fall, and your finance ministry starts buying billions of rubles worth of foreign currency, the strength of that currency stops looking quite so much like a victory and starts looking like another symptom of an economy that's become increasingly distorted by war and sanctions. So hopefully you found today's video useful, informative, and most importantly thought-provoking. If you've liked what I've said then please give me that thumbs up. Please subscribe to the channel if you haven't done so already. If you have the option of hitting that hype symbol, please do that. 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