Joe Biden quipped that the “unprecedented” force of Western sanctions against Russia had reduced the rouble “to rubble”.
While that may have been true at the beginning of Vladimir Putin’s war in Ukraine, this was in March and the US President might have been wise to check how the rouble was faring before speaking.
An initial salvo against Moscow over the invasion of Ukraine devastated Russia’s currency, which plunged to as low as half its pre-war value within days.
But as the White House gloated of the economic destruction that depreciation could unleash, the rouble was staging a comeback.
At that moment, it was about 39pc up from its post-invasion nadir. Just weeks later it returned to pre-conflict levels. The increases didn’t stop there: the rouble has continued to soar, and now, three months after Putin first unleashed his forces against Ukraine, is roughly a quarter stronger.
“The rouble is strengthening at a crazy pace – we need to be careful not to overdo it,” Alexander Lukashenko – Belarus’s president and a key ally of Putin – told the Russian leader jokingly at a meeting last week.
The swift rebound has potent symbolism, driving home the toughness of ‘Fortress Russia’ which can claim it has been able to bear the brunt of financial warfare on a scale never seen before. It has been fuelled by Moscow’s capital controls and its export engine.
“A lot of Russians gauge the state of the economy by the rouble rate,” says an economist at a major European bank. “One of the goals is to just signal to the general population that everything's fine, that the Western sanctions didn’t break the economy.”
“From a purely political perspective, having a strong currency means Putin can stand up and say: ‘the West has imposed all these sanctions against us. But the currency has held up really well’,” says Jason Tuvey from Capital Economics.
The reality is more complicated, and points to the delicate path ahead for Putin as he tries to keep his pariah economy on track. He is in danger of overcooking his currency.
In reality, it is little surprise the rouble has bounced back.
‘Fortress Russia’ is not only about Putin’s warchest of foreign exchange reserves - which is partially frozen - or the country’s recent history of conservative fiscal policy, steady budget surpluses and war-time capital controls. It is about exporting about a billion euros worth of fuel into the West every single day.
Its dominance in energy underpins big trade surpluses, which have traditionally allowed Moscow to maintain strength in its currency by giving the country sway over the amount of roubles in circulation across global markets.
The war has pushed up the price of Russia’s fuel, which it continues to export at levels similar to pre-war. That has kept foreign reserves flowing into Moscow in huge levels - allowing it to prop up the rouble.
At the same time it is importing far less goods amid sanctions, widening Russia’s surplus even further. In the first quarter of the year, its current account surplus reached $58bn (£46bn), the highest in recent history, and is expected to pass $200bn by the end of the year.
There is little sign this dynamic will shift anytime soon, unless the West pushes ahead with efforts to wean itself off Russian energy. European governments have set out plans to dial down their reliance, but a serious cutback isn’t likely before 2023 at the earliest.
On top of that, the Central Bank of Russia – guided by veteran governor Elvira Nabiullina – introduced tight capital controls at the onset of the conflict, forcing exporters to convert their earnings into roubles.
“The rouble is strengthening due to exceptionally high foreign exchange inflows from energy sales, tight capital controls on ruble convertibility, and low market liquidity,” says Elina Ribakova, deputy chief economist at the Institute of International Finance (IIF).
“While this is not a free market-determined exchange rate, rouble stability is at the same time ‘real,’ in the sense that it’s driven by Russia’s all-time-high current account inflows.”
Ordinarily, a strong currency would carry purchasing power benefits. It should benefit ordinary Russians by increasing the amount they get for their money when buying goods and services from overseas.
But these are not ordinary times. Not only is Moscow under extensive Western economic sanctions, many international businesses have terminated working relations with Moscow.
According to research by the Kyiv School of Economics, which has been monitoring foreign companies severing ties with Russia, over 1,000 big companies have exited the market, with more than 400 more curtailing operations.
Easing capital controls risks opening a floodgate of exits that could severely hurt the rouble. For now, the Kremlin’s rules mean many companies cutting ties with Russia can’t actually do so yet: Western businesses are still sitting on huge amounts of unsellable assets such as offices.
“The elephant in the room here is capital controls,” says Jane Foley, senior foreign exchange strategist at Rabobank. “Hundreds of foreign firms said that they're pulling out of Russia, because of this war – I'm sure a lot of them would sell assets if they could.”
If and when those restrictions do lapse, it will put further pressure on the rouble by prompting outflows, increasing supply of the currency on international markets and weakening it.
“They're fine with people fleeing Russia, but money's more important to them,” according to the European bank economist.
It isn’t just the would-be leavers having an impact. Several major shipping companies now refuse to serve Russian ports, further skewing its trade figures. According to data from FourKites, a consultancy, deliveries to Russia are down about 89pc compared with mid-February, with volumes in consumer-facing industries such as retail and food falling further every single week since late February.
“Russia obviously has a lot of commodities to export, but it needs a lot of tech, machinery, and other luxury goods,” says Foley. “They’re not coming in because of the sanctions.”
A mighty currency has little use in a cloistered economy, however. “If you can't use the currency, what is a currency?” says Kit Juckes, a macro strategist at Societe Generale. “It's not money if I can't use it to buy stuff.”
A strong rouble also poses a threat to Russia’s fiscal surpluses. If it stays at current levels of around 67 roubles to the dollar all year, it will be about 10 roubles stronger than its economic ministry’s forecasts. That will mean dollars brought in from oil sales don’t go as far, presenting the country with billions in potential losses.
That impact becomes all the more painful as Russia is already expected to be undergoing a brutal downturn.
“That comes at the same time the government is facing increased spending in certain areas,” says Tuvey. “Obviously, the cost of the war itself, and then there's various social measures to try and mitigate the impact on households.”
If that happens, Russia may have to tap its National Wealth Fund – or face going cap-in-hand to domestic banks.
Fears have grown in Moscow over recent weeks that the rouble rally may have gone too far, forcing the Kremlin into action.
Early last week, Russia said it would ease capital controls. Meanwhile, last Thursday, the Central Bank of Russia (CBR) took emergency action, bringing forward a meeting by two weeks and slashing its key interest rate from 14pc to 11pc. It marked the third such cut in just a month. The announcement landed hours earlier than its usual timing, and Nabiullina gave no press conference.
An accompanying statement made little mention of the rouble, alluding instead to external conditions “considerably constraining economic activity”. But it was clear officials were moving to cap the currency’s sharp ascent.
Central banks typically weaken their domestic currencies by slashing rates, which makes it less lucrative for investors to hold cash reserves.
The rouble fell in response, notching up a second day of losses as prices responded to the CBR’s fire-fighting.
Rates are still high, giving the CBR more dry powder. “There's a lot of scope for them to alter the value of the exchange rate, or weaken the exchange rate, if that's what they decide that they want to do,” says Foley.
But Ribakova from the IIF says its officials are nonetheless in a “rough spot”. “If they continue loosening, they may open the floodgates of capital flows out of the country,” she says. “In previous crises, $200bn left the country in a matter of months.”
For a while, Russia’s rouble rebound appeared to represent the country’s financial strength. But with no sign that its huge trade imbalance will shift soon – and limited room to manoeuvre – the currency could become a long-term thorn in Putin’s side.