After the escalation of the conflict between Russia and Ukraine, Western economic sanctions against Russia once caused the rouble to fall to a record low of 121.5 to the dollar, triggering associations of Russia's financial crisis in 1998. Now the rouble has soared to levels seen before the conflict between Russia and Ukraine, with the Moscow market trading at 79.7 rubles to the dollar on Wednesday.

It is reported that even though Russia is largely cut off from the global economy, Bloomberg Economic Research expects the country to earn nearly $321 billion from energy exports this year, more than one-third more than in 2021. So despite the incredible scope of sanctions imposed on Russia by the United States and its allies and the withdrawal of a large number of foreign companies, these sanctions will be largely ineffective if foreign countries continue to buy Russian oil and gas.

The importance of paying attention to the ruble exchange rate

It is understood that after the disintegration of the Soviet Union, the exchange rate of the ruble against the US dollar can be said to be the economic indicator that Russians are most concerned about. When hyperinflation broke out in the early 1990s, the rouble collapsed. The rouble fell again after Russia defaulted on its debt in 1998. This year, Russia's capital controls in response to western sanctions also appear to support the rouble, including freezing assets held by non-resident investors and requiring Russian companies to convert 80 per cent of their foreign currency holdings into rubles.

This has led some observers to question whether it is still important for the rouble to return to its previous level, and trading volume for the rouble has fallen to its lowest level in a decade.

Guillaume Tresca, a senior emerging markets strategist at Generali Insurance Asset Management, says this is a good public relations tool for politicians, who can say that sanctions have no impact. And it will help limit the impact of inflation. But Tresca said that given all the measures taken by the authorities, the rouble is no longer a free-floating currency. U.S. Treasury Secretary Yellen made similar remarks in testimony to Congress on Wednesday, warning against reading too much into the rouble's rebound.

However, it is still hard to ignore the fact that other countries buy Russian oil and gas. Doing so would create a current account surplus and weaken the effect of sanctions against Russia.

Brendan McKenna, a strategist at Wells Fargo Securities, said the current account surplus should actually be another source of stability for the rouble and should maintain a current account surplus if energy prices remain high and Russia's major importers of energy and commodities continue to buy goods from the country. McKenna expects the rouble to hit 78 to the dollar, in part because of Russian President Vladimir Putin's anti-sanctions measures.

Summary

On the wholeRussia has stabilized its domestic market and even avoided a default on foreign bonds, at least for the time being.This means that countries that oppose Mr Putin may have to change their positions if they want to bruise the rouble again. It is worth mentioning that just this week, the US Treasury banned the Russian government from repaying dollar debt through US bank accounts in an attempt to deplete its domestic dollar reserves or default on its debt.

Elina Ribakov and Benjamin Hilgenstock, economists at the Institute of International Finance, said that as the Russian economy and financial sector gradually adapted to the new balance brought about by capital controls, managed prices and economic self-sufficiency, it was not surprising that the domestic market stabilized, and pointed out that Western financial sanctions against Russia could be further tightened or even decoupled more Russian institutions from SWIFT.

Research company Tellimer Ltd. Warn against trusting the rise in the market at a time of negotiations between Russia and Ukraine. Paul Domjan, a senior special analyst at the institute, said investors should be very cautious about the market rebound triggered by news of the peace talks.