Ruble Suddenly and Very Sharply Rose Despite USD’s Rally on Hawkish Fed

Since the Russia’s Central Bank can neither buy nor sell currency due to the foreign sanctions to maintain the exchange rate, it applies currency control measures. Their side effect was the distortion of the course. Now the overhang of the supply of currency from exporters, since the tax period is underway, exceeds the demand for it.

The Russian ruble strengthened sharply to 75.78 per dollar on Thursday, April 21, adding more than 2 rubles in two minutes, further appreciating to 77.03 per dollar on Friday. So, any previous popular comments that this has been an odd trend having nothing to do with true Russia’s economic fundamentals, suffering from broad and harsh sanctions, yielded to curiosity of finding reasons of what is happening.

In news, yesterday the central bank loosened slightly its capital controls on export-oriented companies outside the commodity and energy sectors, extending the deadline by which they must convert foreign currency into rubles from three days to 60 days.

But as if it was not enough, the ruble entered a new fiscal cycle and became backed by tax payments as companies have to pay a record 3 trillion rubles ($37.40 billion) in taxes this month, which requires all exporters to sell their foreign currency proceeds. Let’s just pick one of the plethora of new takes on that. HSBC (on ruble’s strength, source: HSBC Research, 04/11/2022):

“A rapidly growing trade surplus could be a problem for the Russian authorities. In the first quarter, it amounted to $58.2 billion. If the EU does not impose sanctions on Russian energy, it will grow to $230 billion in 2022. This is an increase from $122 billion in 2021. This supports the ruble. In addition, exporters must convert 80% of the proceeds, and the Central Bank cannot balance the surplus through the purchase of foreign currency. The outflow of capital also stopped.”

Indeed, according to the new rule, all Russian raw materials and energy exporters are required to sell foreign exchange earnings within 3 days. Now there is a tax period, they need to pay taxes to the budget. For other exporters, the Central Bank recently extended the period to 60 days for the conversion of 80% of foreign exchange earnings. The regulator's decision is an apparent recognition that the current exchange rate is detrimental to the economy in the face of the upcoming transformation and recession.

That is, the market is now such that the exchange rates are driven by individual chaotic offering orders of random exporters. And the ruble falls with a gap on the news from the Bank of Russia that it once again eased restrictions on the capital control or cut the key rate. This is how the modern foreign exchange market works.

Since most orders are now automated and robots are heavily used by Fx traders, it is possible that at the time of placing an offer to sell the currency, the trading robots simply happen to immediately remove their weakening bids, and that amplifies the whole trendsetting story. So the ruble now looks like a very interesting, potentially Nobel Prize winning study, unveiling how currencies may behave in isolated environments.