Research & Insights #22

Central Bank. The Russian ruble continued its strong recovery, falling below 60 rubles to the dollar again this week. In theory, the ruble is the world’s best performing currency with a 30% rise since the beginning of the year. However, the exchange rate is artificial as the Central Bank of Russia has put in place strict capital controls following the imposition of sanctions by the West. Most experts believe that the national currency is currently overvalued. Russian authorities will continue to take measures in the coming weeks to ease the pressure on it. On 24 May, the Ministry of Finance reduced the mandatory sale level of export earnings from 80% to 50%. On 26 May, the Bank of Russia cut interest rates by 3%. A simple way to prevent the ruble from strengthening is to ensure now that Russian companies can pay their foreign debt in foreign currency, to stimulate foreign currency purchasing. Current EU and US sanctions make such transactions difficult.

Foreign debt. Once again, Russia is moving closer to a potential default on its foreign currency debt. The US will not extend the General License 9A (GL9A), which allowed the Russian state and its companies to service their debt in dollars to international investors. This could lead to a cascade of defaults, the US Treasury Department’s Office of Foreign Assets Control (OFAC) said on 24 May. Without this licence, it will be very difficult for the state or companies to pay, forcing them to default. Russia has some US$75 billion in outstanding debt, of which 15% is foreign debt. With an estimated current account surplus of some US$200 billion in 2022, the government has enough money to cover its bond obligations. It seems that that the US would rather force Russia to default than allow the country to pay its US creditors.

NATO. Following Russia’s military intervention in Ukraine, Sweden and Finland have officially applied to join NATO. Traditionally neutral, these two states have recently seen their public opinions rapidly shift in favour of joining the politico-military alliance. Seventy-six percent of Finns are now in favour of membership, compared to 12 percent who are against it. Moscow has warned against the move, saying it would damage relations and that Russia would retaliate. Turkish President, Recep Tayyip Erdogan, said he opposed the alliance’s expansion, citing concerns about the presence of “terrorists” in Finland and Sweden. Turkey has set several conditions for accepting Sweden’s application for NATO membership. Sweden must lift sanctions against Turkey, including the arms export embargo, end “political support for terrorism”, eliminate sources of funding for terrorism and stop supplying arms to the PKK and its armed Syrian wing, the YPG.

Food crisis. Wheat prices have reached record levels in the last two months and have risen by more than 60% since the beginning of the year. The surge has been triggered by the conflict between Russia and Ukraine, which supply almost a third of global wheat exports, and by droughts around the world. Major producers such as Russia, Kazakhstan and India have already restricted exports to protect their domestic markets. There are currently 20 million tonnes of wheat blocked in Ukraine. Usually, the country exports five million tonnes of grain per month. Currently, Kyiv can only export a fraction of its production, between 200,000 and one million tonnes per month. For its part, Moscow is seeking to strengthen control over its grain exports. According to the Russian daily Kommersant, it wants all members of the Eurasian Economic Union to introduce quotas and duties on grain exports to third countries, fearing that Russian grain will be re-exported to other markets.

DISCLAIMER: The statements, views and opinions expressed in this article are solely those of the author and may not necessarily represent those of Equinox.

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