The Russian ruble has undergone an astonishing recovery, surging to levels not seen in almost two years, after losing over half of its value in March owing to Western sanctions. Sergey Kopylov, a junior partner at consultancy firm BSC and a lead researcher at Plekhanov Russian University of Economics, unravels the mystery of the rising ruble.
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According to the researcher, when the assets of Russia’s central bank were frozen, the West had failed on its obligations to the country. “This is the abolition (something like cancel culture) of the rules of international financial relations based on global total return swaps, redistribution of risk, guarantees of property rights and distribution of seigniorage.”
The old ruble exchange rate and the approaches to its establishment that we are familiar to were established by these rules, according to the expert, who added that those rules “no longer apply.”
The ruble is gaining because it is now solely based on exports and imports, and its value is decided by its purchasing power parity (PPP), according to Kopylov. The International Monetary Fund (IMF) forecast the Russian currency’s PPP at 29.127 rubles per dollar at the end of 2021. That rate was 23.24 rubles to the dollar, according to the Big Mac Index.
Prior to the sanctions, the artificial weakening of the Russian ruble was aided by capital outflows, according to the expert. Net exports (the difference between goods and service exports and imports) were $122 billion in 2021. He added the foreign exchange proceeds were utilized to buy international assets.
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This outflow has become difficult because of sanctions and the West’s failure to meet its financial obligations to Russia, according to Kopylov. As a result, the $58 billion in first-quarter revenue received by the Russian economy “puts pressure” on ruble appreciation.
“Expert assessment shows that under these conditions, the ruble may strengthen to the level of 45-to-50 rubles per one US dollar if there is no adjustment in monetary policy,” Kopylov concludes.
As of Friday, the Russian currency was trading at roughly 69 rubles per US dollar.