Putin’s plan to collect the ruble could run out of gas

After making the ruble unpalatable to investors and savers, President Vladimir Putin is trying to create additional demand for the Russian currency in its only remaining market: tied commodity buyers. But this well can be almost dry.

On Wednesday, the ruble rose again against both the US dollar and the euro to roughly where it was on February 24, the day Russia first invaded Ukraine. Capital controls and interest rates rising from 9.5% to 20% are among the reasons why the exchange rate has decoupled from Russia’s economy, which is expected to contract by 5.7% this year due to Western sanctions, according to FocusEconomics .

The currency’s surprising strength in recent days follows Mr Putin’s announcement that he wants Europe to pay for natural gas in rubles rather than euros and dollars.

The exclusion of energy exports from the sanctions has given the ruble a bottom. While Russia has frozen around $300 billion of its foreign exchange reserves, its current account surplus is expected to rake in more than $20 billion every month. The European Union gets 40% of its gas and 30% of its oil from Russia.

If Mr. Putin really wants to turn that dependency into additional demand for his currency, gas might just be the start.

About 40% of world trade is invoiced in dollars, although US exports account for only 10%. Research by the International Monetary Fund has found that the prices of traded commodities move with the greenback, even in cases where neither country uses the dollar and their bilateral exchange rates shift in a different direction. It shows why billing in your own currency can give you power: Because prices are “fixed,” foreign buyers pay more when the exchange rate rises. This is what Russia could get from ruble billing, Professor Alexander Mihailov of the University of Reading argued on Tuesday.

Although gas is a somewhat segmented market, Russia is not a large exporter of differentiated goods with rigid prices. Instead, it is a mammoth seller of commodities whose prices fluctuate in real time, moving to offset changes in the dollar.

Getting importers to use the ruble would make it more liquid, but not necessarily bring it more buyers. When exporters are paid in foreign currency, they convert much of it into local money anyway to pay workers and suppliers. In Russia, the government already requires them to exchange 80% of their earnings, which is used to channel dollars and euros through unsanctioned banks to importers who need them.

Sure, forcing foreigners to buy the ruble would increase the conversion rate to 100% on some trades and perhaps give the central bank additional control over reserve management. But Moscow could also ask state-owned Gazprom to sell more euros.

Mr Putin’s threats to rewrite energy contracts – which the Group of Seven has already called “unacceptable” – are likely to be bad for the ruble in the long run. They are escalating tensions and accelerating European plans to buy gas elsewhere.

There is a misconception that dollar billing is the cause rather than the consequence of the greenback’s “exorbitant privilege” within the monetary system, which instead is built on the US’s hegemonic role in the global economy. Russia depends on the West for key technologies in sectors like semiconductors, aeronautics, and even energy exploration and production, which are hit hard by sanctions. Over time, commodity export volumes themselves may be lower.

The value of the ruble comes from the amount of Russian stuff foreigners buy, not the currency they pay in. Ultimately, the exchange rate will reflect this.

The consequences of the tough economic sanctions against Russia are already being felt around the world. WSJ’s Greg Ip joins other experts in explaining the significance of what has happened so far and how the conflict could transform the global economy. Photo illustration: Alexander Hotz

write to Jon Sindreu at jon.sindreu@wsj.com

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