Russian rouble rebounds after Kremlin brings back capital controls

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The rouble climbed by about 4 per cent against the dollar on Thursday after the Kremlin reintroduced capital controls for the first time since the aftermath of Russia’s invasion of Ukraine last year.

Vladimir Putin, Russia’s president, signed a decree late on Wednesday forcing 43 companies, including energy, metals and agriculture exporters, to sell some of their foreign currency revenue on the domestic market to prop up the slumping rouble.

Despite Thursday’s bounce, the currency remains 23 per cent lower against the dollar this year and has fallen by about a quarter since the war’s outset after western sanctions battered the country’s economy.

Russian policymakers moved to stop the rouble from sliding further after it briefly weakened below the psychologically important barrier of 100 to the dollar for the second time in three months last week. It was trading at Rbs95.94 on Thursday.

Western sanctions over the invasion have cut into Russia’s export revenues and deepened the country’s budget deficit while the Kremlin ratchets up military spending for its war machine.

In 2022, four days after Russia began its full-scale invasion of Ukraine, Russian authorities imposed currency controls, forcing the exporters to sell at least 80 per cent of their foreign currency revenue on the domestic market. Three months later, the volume was reduced to 50 per cent, and another month later the requirement was cancelled.

In August, when the rouble last broke through the 100 mark, the central bank raised interest rates by 3.5 percentage points at an emergency meeting. It raised them a further 1 percentage point to 13 per cent in September.

Putin also held an inconclusive meeting with policymakers on reintroducing capital controls, leading to informal pressures on exporters to sell their revenue.

But the measures had so far proved unable to halt the currency’s decline, prompting Putin to complain last month that the weak rouble was driving inflation. “It is necessary to understand the causes behind this, and to make appropriate decisions without delay,” he told officials.

While a large rate increase would have probably eased pressure on the rouble in normal circumstances, western sanctions and Russia’s own restrictions on cash flows blocked investors from trading it. Meanwhile, a surge in subsidised lending to the defence industry and mortgage market lessened the impact of rate rises on overall credit conditions, according to Tatiana Orlova, lead emerging markets economist at Oxford Economics.

“The mandatory requirement to sell export revenues will be effective if it applies to exporters generating a high share of total export revenues,” Orlova said. “Back in August, the authorities chose to use suasion to ensure that exporters sell their export revenues on the open market. Perhaps suasion is not as effective as a presidential decree, as disobeying the latter will have clearer negative consequences,” she added.

The central bank, which had previously opposed new capital controls, said on Thursday that the move would help tame volatility and improve liquidity on currency markets.

The decree has not been made public in full. But in an announcement late on Wednesday, the government said the “compulsory repatriation” of revenue would require exporters to sell their foreign currency according to a set timetable and allow the government to monitor them.

Andrei Belousov, the first deputy prime minister behind the measure, said he expected the requirements would not be too “burdensome” for Russia’s exporters.

“The main goal of these measures is to create long-term conditions for raising transparency and predictability on the currency market while reducing opportunities for currency speculation,” he said in a statement.

Russia’s commodities exporters have grumbled for months at the Kremlin’s attempts to raise extra budget revenue through stop-gap measures like a windfall tax on metals producers, a benchmark for oil export transactions at a discount to international prices, and lower subsidies for fuel producers.