The Potential for Russian Currency to Increase in Value Against US Dollar and Euro

In recent years, the value of the Russian ruble, often denoted as RUB, has fluctuated significantly in relation to the US dollar (USD) and the European euro (EUR). Can the Russian currency increase in value against these major currencies? The answer is yes, but there are numerous complexities and constraints that need to be understood.

Central Bank Constraints and Economic Challenges

The Russian central bank operates under certain limitations that complicate efforts to influence the currency value. One significant constraint is the sanctions imposed by various countries, which limit the bank's operational flexibility. Furthermore, the central bank is facing a lack of reserves necessary to decrease the ruble supply. This situation is exacerbated by the substantial financial investments in the war economy and military payments, which place additional currency into circulation and subsequently withdraw it.

In the short term, Elvira Nabiulina, the outgoing central banker, has taken steps to increase the value of the ruble. By raising interest rates, the money supply is decreased, leading to a higher demand for the ruble in exchange for foreign currencies. This mechanism helps stabilize the currency value to some extent, but it is a short-term solution with long-term implications.

Risks and Challenges

However, holding the ruble carries inherent risks due to its historical weakness against foreign currencies. Additionally, high inflation exacerbates the situation, making the ruble less attractive as an holding asset. The liquidity of rubles can also be an issue, as investors may be hesitant to keep the currency if they perceive a risk of depreciation. Consequently, many Russians are not inclined to hold rubles unless absolutely necessary.

To stimulate demand for rubles, the Russian government has been pushing for payments in rubles. However, these efforts may inadvertently undermine the currency's credibility. Successful implementation of these policies would require a consistent and reliable economic environment, which is currently lacking.

Long-Term Consequences and Pitfalls

The high-interest-rate strategy has both short-term and long-term impacts on the economy. In the short term, it helps control inflation and stabilize the exchange rate. However, in the long term, it can have detrimental effects. By raising interest rates, Consumption and Investment become more expensive, leading to a decrease in demand and a slowdown in economic growth.

Additionally, expensive and unhealthy investments, financed by subprime loans, can further erode economic stability. As a result, the economy might face a situation where it is less conducive to long-term growth and less attractive to investors. Therefore, while current measures aim to address immediate issues like inflation and exchange rate volatility, they may inadvertently weaken the currency and the economy in the long run.

Conclusion

The Russian ruble's value in relation to the US dollar and the euro is a complex issue influenced by numerous factors. Short-term measures taken by the central bank, such as raising interest rates, can provide temporary stability but might not be sustainable in the long term. The risk of undermining economic growth and the risk of losing credibility make it essential to consider alternative strategies. While the full euro or dollar may depreciate faster, the Russian central bank needs to balance short-term fixes with long-term economic stability strategies.