This is a useful piece of economic theory which I will be discussing with my classes. After the Russian invasion of Ukraine the Russian currency the Rouble collapsed:
- Before the invasions 1 euro = 85 Roubles
- After invasion 1 euro = 110 Roubles
- After central bank intervention 1 euro = 94 Roubles
This means that it cost post invasion 110 roubles to buy 1 euro, compared to 85 Roubles pre-invasion. The Russian central bank did intervene in the foreign exchange market by using its foreign exchange reserves to buy roubles – demand for roubles goes up. The plan is to sell US$ and euro denomination investments to buy roubles. However a ban on the central bank using swift payments to access reserves overseas has meant that intervention was not an option.
At such low levels the Russian exports are going to bring in less money to ultimately subsidise the war effort. A stronger Rouble will bring in more cash and enhance the image on the country – the value of a country’s currency is a good indicator of how the world views that country.
How will it work?
Putin’s order makes Gazprombank the intermediary in the gas trade. A foreign buyer of gas is required to transfer foreign currency to a special account (so-called K) at Gazprombank. They would then buy roubles on behalf go the gas buyer to transfer roubles to the another special (K) account at Gazprombank – see flow chart.
Why does it matter?
Europe is heavily reliant on Russia for its energy needs, with around 40% of its gas coming from the country. If Moscow decides to turn off the taps it could trigger supply shortages, factory closures and crippling energy costs across the region.
Call in the church to stop the slide in the Rouble
However, a last resort could be a repeat of 2014 (see previous post ‘Russian economy – Priests to halt slide of Rouble?’) when priests blessed the servers at the Central Bank with holy water to reduce the then collapse of the Rouble – see below.
For more on exchange rates view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.