• The ruble crashed when Russia invaded Ukraine, but the Kremlin’s strict policies have since sent it soaring.
• Moscow is now trying to lower the currency by rapidly loosening those rules, as ruble strength threatens the government budget.
• Insider spoke to a broker in Moscow who explained why the ruble has been on such a wild ride, and what the government’s doing about it.

In late February, just after Russian tanks rolled into 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, and Russia is facing the opposite problem. The ruble has risen rapidly — perhaps by too much — and threatens to become a burden for the country’s exporters and budget.

Last week, the Central Bank of Russia slashed interest rates down to 11% — they stood at 20% in late February — as it tried to tame the rampant ruble.

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

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

Insider this week spoke to Iskander Lutsko, chief investment strategist at broker ITI Capital in Moscow, to get a take from inside the country.

Strong ruble threatens government spending

Lutsko said the ruble had become too strong for the Russian government, in particular because it posed a threat to the budget. That’s a worry for Moscow, which has ramped up its spending as it funds its operations against Ukraine and as the Russian economy slows under the weight of sanctions.

Russia’s oil and gas exports now account for around 65% of tax revenue in the country, Lutsko estimated, as prices have surged and other industries have suffered due to sanctions.

“Our reliance and sensitivity to oil prices have significantly increased,” he said.

The issue is that energy sales are predominantly priced in foreign currencies, particularly dollars. These must be converted back into local currency for spending in Russia, and a high exchange rate means the government gets fewer rubles for its sales.

Almost all restrictions loosened

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

A key move has been a cut for exporters in the amount of foreign-currency earnings they must convert into rubles, from 80% down to 50%. The government has also hiked the amount Russians can transfer out of the country, to $50,000 from $10,000.

Lutsko said the ruble has been weakened by a rumor — which the central bank denies — that the government could resume an earlier policy for oil and gas revenues. The speculation is it might put some of these foreign-currency revenues directly into Russia’s sovereign wealth fund.

The ruble was up around 2% Tuesday to trade at roughly 63 to the dollar, but has weakened considerably from 55 earlier this month. It’s still far stronger than the 140 level hit just after the invasion.

Government still controls the currency

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

Moscow is able to control the currency thanks to the huge inflows of money it’s receiving from oil and gas sales, boosted by the jump in energy prices.

“The current account — balance of payments — has enjoyed maybe one of the best five months in its history because of the high oil price,” the strategist said.

Other analysts are making a similar point. Robin Brooks, chief economist at the Institute for International Finance, tweeted Sunday: “To really hurt Russia, you must hit its current account surplus, which only an energy embargo does.”