• The ruble crashed when Russia invaded Ukraine, but strict Kremlin policies have since sent it soaring.
• Moscow is now trying to drive the currency down by quickly relaxing those rules, as the ruble’s strength threatens the government’s budget.
• Insider spoke with a broker in Moscow who explained why the ruble had such a wild ride and what the government was doing about it.

At the end of February, just after the arrival of Russian tanks in Ukraine, the ruble crashed. In response, the Central Bank of Russia more than doubled interest rates to convince people to keep their money in the bank.

Three months later, Russia faces the opposite problem. The ruble has risen rapidly – ​​perhaps too much – and threatens to become a burden on exporters and the country’s budget.

Last week Russia’s Central Bank cut interest rates to 11% – they stood at 20% at the end of February – as it tried to tame the endemic rouble.

Some analysts and economists are skeptical of this narrative. Timothy Ash, strategist at BlueBay, said the idea that the ruble has become too strong is “all part of the Kremlin’s PR” and that the currency is “managed in stages”.

Whether that’s the case or not, Russia is quickly easing many of the tough policies it put in place to boost the ruble at the start of the war.

This week, Insider sat down with Iskander Lutsko, chief investment strategist at Moscow-based brokerage ITI Capital, to get some inside-the-country insight.

A strong ruble threatens public spending

Lutsko said the ruble has become too strong for the Russian government, not least because it poses a threat to the budget. That’s a concern for Moscow, which has increased spending as it funds its operations against Ukraine and the Russian economy slows under the weight of sanctions.

Russian oil and gas exports now account for about 65% of the country’s tax revenue, Lutsko estimated, as prices jumped and other industries suffered from sanctions.

“Our dependence and sensitivity to oil prices has increased significantly,” he said.

The problem is that energy sales are mostly denominated in foreign currencies, especially in dollars. These must be converted back into local currency to be spent in Russia, and a high exchange rate means the government receives fewer rubles for its sales.

Almost all restrictions eased

So what action is the Kremlin taking? Lutsko says Moscow has reconsidered virtually all of its capital controls, except for limits on the use of dollars.

A key measure has been a reduction for exporters of the amount of foreign exchange earnings they have to convert into rubles, from 80% to 50%. The government has also increased the amount Russians can transfer out of the country from $10,000 to $50,000.

Lutsko said the ruble was weakened by a rumor – which the central bank denies – that the government may resume a previous oil and gas revenue policy. Speculation is that he could put some of that foreign currency revenue directly into Russia’s sovereign wealth fund.

The ruble rose about 2% on Tuesday to trade at around 63 to the dollar, but has weakened significantly from 55 at the start of the month. This is still much stronger than the level 140 reached right after the invasion.

The government still controls the currency

Lutsko said the Russian government and central bank are still the dominant forces controlling the ruble, with little foreign trade to speak of.

Moscow is able to control the currency thanks to the huge cash inflows it receives from oil and gas sales, boosted by soaring energy prices.

“The current account – the balance of payments – had perhaps one of the best five months ever due to the high price of oil,” the strategist said.

Other analysts make a similar point. Robin Brooks, chief economist at the Institute for International Finance, tweeted sunday“To really harm Russia, you have to reach its current account surplus, which only an energy embargo can do.”