The Ruble as Weatherglass of a

Competing Trade-and-Finance Axis

Bill Campbell | August 2022

The sanctions imposed by the G-7 countries on Russia in the wake of the Russian invasion of
Ukraine raised high expectations among Western leaders. U.S. President Joe Biden declared
on March 8, “We are enforcing the most significant package of economic sanctions in history,
and it’s causing significant damage to Russia’s economy. It has caused the Russian economy
to, quite frankly, crater.”1 In a March 26 tweet, the president crowed, “As a result of our
unprecedented sanctions, the ruble was almost immediately reduced to rubble.”2 Today,
while confronted with recession, Russia nonetheless has largely taken these sanctions in
stride. On the war front, viewed from a tactical perspective, Moscow has continued military
actions in Ukraine, gaining territory and disappointing a spate of optimistic Western
predictions in the process.3 The Kremlin also has turned the tables on Europe by holding the
continent hostage due to its dependence on Russian energy. On the strategic front, Russia is
enlarging trade and financial relationships with China, India and other Asian economies as
it looks to secure its economic and geopolitical future.

Russia is home to a mountain of natural resources that the country has used to gain wealth
and influence around the globe as one of the largest exporters of commodities. For decades,
Western countries have invested in Russia to source energy, agriculture, fertilizer and other
raw materials. This created a dependence in the West on these supplies from Russia and
put Russia in a position of strength when Moscow decided to invade Ukraine. In fact, the
sanctions imposed by the West on Russia might be inflicting more damage to the West
than to these measures’ intended target. As I noted in a previous paper, those sanctions
accelerated the development of a Beijing-Moscow trade-and-finance axis.4 In light of
Russian resilience, including the strength of Russia’s currency and current account surplus,
the China-Russia axis has gained credibility as an exemplar to other sovereign governments
seeking alternatives to a world order once dominated by the G-7 countries.

Views and opinions expressed herein are those
of the individual portfolio manager and do not
necessarily reflect the views of DoubleLine
Capital LP, its affiliates or employees.
Western sanctions against Russia have not only failed to work as intended, they also have
accelerated trends in global trade and finance to the disadvantage of the West. Investors
should keep these developments on their radar, as resulting opportunities in emerging
markets and infrastructure projects are likely to become more apparent in the quarters
and years ahead.

DoubleLine Capital || 333 S. Grand Ave., 18th Floor || Los Angeles, CA 90071 || (213) 633-8200 || doubleline.com || @DLineCap
 The Ruble as Weatherglass
of a Competing Trade-and-Finance Axis
Bill Campbell | August 2022

Sanctions and Energy Prices

A series of coordinated G-7 sanctions put in place on Russia since
the invasion of Ukraine has frozen Russia out of the Western
global financial networks for almost all transactions expect for
energy. The fatal flaw in the construction of these sanctions was
the exclusion of Russian energy exports. This has allowed the
Russian government to continue strategically vital sales of natural
gas, oil and coal. The sanctions have allowed Russia to further
strengthen its current account balance as the price of energy has
soared well past the financial impact that might have occurred
from any decrease in export volume. Russia’s current account
surplus totaled $138.5 billion by the end of the first six months
(January-June) of 2022. This compares to $39.7 billion at the end
of the first six months of 2021. (Figure 1) As noted by Central
Bank of the Russian Federation (CBR), the current account surplus
was expanded by a significant growth in exports and a decline in
imports.
Russia Current Account Balance
(6 mo chg, $ Bln) December 31, 2007 through June 30, 2022
140 June 30, 2022
138.48
120
100
June 30, 2021
39.98
80
60
40
20
In the months following the invasion of Ukraine, global energy
prices skyrocketed, especially energy prices paid by Europe. As
Russia accounts for a significant portion of the energy needs
of Europe and indeed the world, the result was windfall profits
to Russian energy exporters in the form of foreign currency
payments. At the same time, sanctions by the West on the Russian
economy have brought about a severe contraction in imports of
goods and services to Russia, as the sanctions have frozen the
Russian banking system out of the Western financial system. This
will likely keep imports constrained in the foreseeable future.
To be sure, the sanctions have had an impact on the domestic
Russian economy, as retail sales in Russia dropped about 10%
year-over-year in May, reflecting the recessionary headwinds
facing the country. This drop in domestic consumption has
resulted in a dynamic whereby Russians’ demand for foreign
currency has plummeted while they continue to receive a large
supply of foreign currency via revenues from the commodity-
exporting companies. Moreover, a report from the Centre for
Research on Energy and Clean Air estimates that Russia earned
€93 billion in revenue from fossil fuel exports in the first 100 days
of the war (Feb. 24 to June 3).5
Central Bank of the Russian Federation:
Playing to the Ruble’s Strength
On Feb. 28, the CBR implemented rules for exporting companies
in Russia, mandating the conversion of their export proceeds
from foreign currency back into rubles. When the rule was
implemented, the CBR required exporting companies to convert
80% of their foreign currency revenues back into rubles. The goal
was to help stabilize the sell-off in the currency. From mid-March
through May, the ruble not only recovered the losses experienced
at the start of the Ukraine crisis but appreciated beyond the levels
it traded at prior to the crisis. This program was so successful that
the CBR on May 23 was able to relax the percentage of revenues
required to be converted from 80% down to 50%. The ruble has
remained well supported since that time. (Figures 2, 3)

Figure 1
Source: DoubleLine, Bloomberg

2
 The Ruble as Weatherglass
of a Competing Trade-and-Finance Axis
Bill Campbell | August 2022

Russia’s Resilient Ruble | December 31, 2021 through July 31, 2022

Feb. 21 Feb. 28 May 18 May 23

Russian Federation Central Bank of the Russian Finland and Sweden CBR relaxes the ruble conversion
percentage of Russian export
0.020 President Putin
orders army into
Federation (CBR) mandates
Russian exporters convert 80%
apply to join NATO.
revenues from 80% down to 50%.
Jan. 26, 2022 Ukrainian regions of export proceeds from foreign
In response to Moscow’s of Luhansk and currency back into rubles.
0.018 security demands, Donetsk. The U.S.
Washington reiterates its and European Union March 2
commitment to NATO’s announce the first United Nations General Assembly
0.016 “open-door” policy while
saying it is open to arms
sanctions. Full-scale condemns Russia’s invasion of
Russian invasion Ukraine: 141 votes, including all
control talks with Moscow. of Ukraine starts G-7 countries, for the resolution;
0.014 Feb. 24. 5 opposed; and 35 abstentions,
July 11
including China and India.
The Reserve Bank of India
announces an arrangement for
0.012 settling exports/imports in Indian
rupees. The probable aim is
to facilitate expanded
0.010 April 1 Indian-Russian trade.
After talks with India’s prime minister and external affairs minister,
Feb. 4 Russian foreign minister says Moscow is progressing toward trade
Russian natural gas monopoly
0.008 Gazprom, which already
settlement in national currencies with India and other countries.

exports to China, announces March 25

a contract to supply 10 billion
0.006 cubic meters of natural gas a
year via a new pipeline.
0.004
Russian Ministry of Defense announces
March 11 it will focus on “liberating” Ukraine’s
The G-7 and EU announce Donbas region. Russian troops start to
joint sanctions. pull out of Kyiv, Chernihiv and Sumy. Ruble Against the Dollar Ruble Against the Euro

Figure 2
Source: DoubleLine, Bloomberg, various news reports

2021: In January, Ukraine President Volodymyr Zelensky appeals to U.S. President Joe Biden to permit Ukraine to join NATO. In the
spring, Russia begins massing troops near Ukraine’s borders in what it says are training exercises. On Dec. 7, Biden warns of sweeping
Western sanctions against Russia if it invades Ukraine. Dec. 17, Moscow demands that NATO withdraw forces from Eastern Europe and
commit to never admitting Ukraine as a member.

Ruble in Multiyear Highs vs. Dollar, Euro This currency strength, the direct result of a supply-demand
Jan 1, 2019 through August 2, 2022 imbalance in the ruble produced by the sanctions, should have
0.021 been foreseen by G-7 policymakers. In fact, Russia not only is
RUB-USD X-RATE RUB-EUR X-RATE resource rich, she also has the extraction and supply chains needed
0.019 to bring those resources to global markets. Those advantages
have put Russia in a position to stem even Western sanctions. For
0.017
the foreseeable future, I believe Moscow can pursue its policies
0.015
in Ukraine, undeterred by the G-7 sanctions. In fact, Russia’s
majority state-owned energy exporter, PJSC Gazprom, on July 25
0.013 announced a further reduction in the flow of natural gas through
the Nord Stream 1 pipeline to half of the already-reduced volume.
0.011 This will put into question the ability of Germany and other
European Union (EU) countries to make it through the winter
0.009
without having to resort to electricity blackouts. For the sanctions
0.007
to achieve the stated goal of softening Moscow’s commitment to
the invasion, I believe Western democracies, especially those of
0.005 Europe, would need the political will to incur severe economic
and political consequences at home.

Figure 3
Source: DoubleLine, Bloomberg

3
 The Ruble as Weatherglass
of a Competing Trade-and-Finance Axis
Bill Campbell | August 2022

The Long Game

To be sure, the West is trying to find ways to end its dependence The Russians are not sitting idle, however. They are using this time
on Russia’s supplies of energy. The EU imports around 4.5 million to adjust their exports to “more friendly” countries that will be
barrels per day of crude oil from Russia, two-thirds of which less willing to sanction their exports. Examples of new energy-
are delivered by tankers. (Figure 4) EU leaders have reached export partners for Russia are China and India, the world’s second
an agreement to embargo maritime oil shipments from Russia and sixth largest economies by GDP. Even before the Ukraine
through a ban on insurance on seaborne Russian oil shipments. conflict, increased energy shipments, and other expansions and
EU Council President Charles Michel said the agreement covers innovations in trade cooperation were already underway among
more than two-thirds of oil imports from Russia. Ursula von der these countries. In December 2019, the Power of Siberia 1 pipeline
Leyen, the head of the EU’s executive branch, said the punitive turned on, starting one of the largest Russia-China liquid natural
move will effectively cut around 90% of oil imports from Russia gas (LNG) pipelines to date. At that time, Gazprom announced
to the EU by the end of 2022. Natural gas dependence, however, by “2023, nearly 40% of Chinese gas demand growth will be met
ergy imports
remains problematic. Russia accounts for about 40% of the natural through Russian gas from Power of Siberia.”6 Plans for a second
extra-EU imports, EU, 2020)
gas imports of the EU. The EU recently agreed to expedite a 15%
ergy imports Russia-China pipeline were announced Feb. 4 when Putin was
reduction
60
extra-EU imports, in natural gas usage across the region, but that will be
EU, 2020) attending the Winter Olympics in Beijing. The Power of Siberia 2
easier
50
60
said than done. Originally scheduled to begin in 2023, the pipeline will divert gas from Russia’s Yamal field, which currently
new
40 agreement, announced on July 26, was supposed to start, in accounts for about a third of Russian LNG exports to Europe. The
50
principle, almost immediately. new pipeline is expected to have about the same capacity as the
30
40 Nord Stream 2 gas pipeline from Yamal to Germany, which has
20
2020
30 EU Imports Share by Origin already been constructed but now is unlikely to enter service.
10
(%
20 share of all extra-EU imports)
The adjustments go beyond commodity exports. Russia is rewiring
0
10 RussiaUnited Australia Colombia Canada Kazakhstan
Natural Gas (inStates
cubic meters)
Rest of its financial ties to “more friendly nations” as well. For example, it
the world
0 is widely believed that the CBR is now intervening in the currency
50 Russia United Australia Colombia Canada Kazakhstan Rest of
States the world market to slow down the pace of the ruble’s appreciation. Russia
40
50 appears to be taking a more strategic framework in rebuilding its
30 reserve assets. Reuters has reported that Russia’s purchases of
40
20
Chinese yuan have grown eightfold since May 20. The sanctions
30
effectively confiscated the majority of the CBR foreign currency
10
20 assets. Thus, Moscow’s shift to holding foreign currencies of
0
10 Russia Norway Algeria Qatar United United Rest of “more friendly nations” will likely be a durable regime.
States Kingdom the world
0
Russia Norway Algeria Qatar United United Rest of On July 11, the Reserve Bank of India (RBI) announced an
40
Crude Oil (in tonnage) States Kingdom the world
arrangement for invoicing, payment and settlement of exports/
30
40 imports in Indian rupees, probably to facilitate expanded trade
20 with Russia. This new system with the RBI enables a bilateral
30
10 ruble-rupee payment system between the two countries. I
20
discussed the coming proliferation of such bilateral arrangements,
0
10 Russia Norway Kazakhstan United Saudi Nigeria Rest of bypassing the U.S. dollar, in a paper last year, as the world moves
States Arabia the world
0 to a more a multipolar order, with the two strongest axes being
Russia Norway Kazakhstan United Saudi Nigeria Rest of
(online data codes: nrg_ti_sff, nrg__gas and nrg__oil)
States Arabia the world the G-7 and China-Russia.7 To no one’s surprise, New Delhi has
Figure 4 chartered a foreign policy in coordination with its imports of
(online data codes: nrg_ti_sff, nrg__gas and nrg__oil)
Source: Eurostat Russian energy and military arms. The Indian foreign ministry has
refused to back U.S. and EU sanctions over the Ukraine conflict
Despite these efforts, it will take years for Europe to rewire its and has emphasized its engagement to stable economic relations
energy infrastructure away from Russian oil and, more importantly, with Russia.8 India was among 35 nations, including China, that
Russian natural gas. In fact, the new agreement provides opt-out abstained in a March 2 vote in which the U.N. General Assembly
provisions for countries that are highly dependent on Russian voted 141 for, five against to condemn Russia’s invasion of
natural gas. Ukraine.

4
 The Ruble as Weatherglass
of a Competing Trade-and-Finance Axis
Bill Campbell | August 2022
The government of the world’s largest democracy by population
also was among 58 nations to abstain on April 7 when 93 nations
in the General Assembly adopted a resolution, over 24 voting
against, to suspend Russia from the U.N. Human Rights Council.9
The Great Realignment: Cui Bono?
Europe and Russia are embarking on a massive realignment
in their energy and trade structures over the coming years as
they seek to bring an end to their mutual co-dependence. Such
a transformation would necessitate an immense infrastructure
build-out. Russia will continue to focus on energy transportation
infrastructure to new markets such as China and the rest of
Asia. Europe will need to build out LNG ports, and refining and
energy storage capabilities. The net beneficiaries from this new
infrastructure will be industrial metals and economies that extract
and export the raw materials for these Eurasia infrastructure
build-outs.
Today, the world is worried about an impending recession caused
by inflation and tightening financial conditions under hawkish
central bank policies aimed at addressing that inflation. Industrial
metals and emerging markets have faced these challenges, but
these markets stand to benefit when the European and Russian
energy infrastructure projects get underway. Given that energy
infrastructure is not only of strategic importance but also a
Endnotes
1
Remarks by President Biden Announcing U.S. Ban on Imports of Russian Oil,
Liquefied Natural Gas, and Coal, White House, March 8, 2022. https://www.
whitehouse.gov/briefing-room/speeches-remarks/2022/03/08/remarks-by-
president-biden-announcing-u-s-ban-on-imports-of-russian-oil-liquefied-nat-
ural-gas-and-coal/
2
President Biden @POTUS, March 26, 2022. https://twitter.com/potus/sta-
tus/1507842574865866763
3
“Has Russia Reached Its ‘Culminating Point’ in Ukraine?” Russia Matters,
Harvard Kennedy School Belfer Center for Science and International Affairs,
July 20, 2022. https://www.russiamatters.org/blog/has-russia-reached-its-
culminating-point-ukraine
4
“G-7 Sanctions Accelerate China-Russia Axis,” Bill Campbell, March 8, 2022,
DoubleLine.com. https://doubleline.com/wp-content/uploads/G-7-Sanc-
tions-Accelerate-China-Russia-Axis_Bill-Campbell-3-8-22.pdf
5
“Financing Putin’s war: Fossil fuel imports from Russia in the first 100 days of
the invasion,” Centre for Research on Energy and Clean Air, June 13, 2022.
https://energyandcleanair.org/wp/wp-content/uploads/2022/06/Financing-
Putins-war-100-days_20220613.pdf
6
“Russia, China agree 30-year gas deal via new pipeline, to settle in euros,”
Reuters, Feb. 4, 2022. https://www.reuters.com/world/asia-pacific/exclusive-
russia-china-agree-30-year-gas-deal-using-new-pipeline-source-2022-02-04/
national security issue for these regions, these projects will likely
be prioritized even in a challenging macroeconomic environment.
Investors should sharpen their pencils now to be ready to benefit
from these secular shifts.
Deepening trade and financial linkages between China and Russia
are creating a rival political and economic pole to the G-7. I think
it is likely that other nations, especially emerging markets with
substantial trade ties to Russia and China, will become parties
to this axis, with Beijing as the senior member. As economic
and financial connections between China and Russia continue
to grow, emerging market countries will need to decide if their
own economic and financial linkages are more tied to China or
to the West. As noted in my previous paper, a multipolar world,
already emerging before Russia’s invasion of Ukraine, has been
accelerated by the G-7’s sanctions against Moscow.10 Within that
multipolar world, some countries will face the binary choice of
a net alignment with the West or China, as in the case of Iran’s
alignment with the latter. Others will endeavor to steer a course
between both axes, as in the case of India. In any event, for
many governments, G-7 alignment will no longer be a default
setting. Russia’s resilience in defiance of some of the most severe
sanctions the West has ever imposed demonstrates the viability
of the Sino-Russo axis for all to see.
7
“Taking Aim at the U.S. Dollar, the World Builds a Multipolar Trade-and-Pay-
ments Order,” Bill Campbell, January 2021. https://doubleline.com/wp-con-
tent/uploads/Taking-Aim-at-the-Dollar-in-a-Multipolar-Order-January-2021.
pdf
8
“India’s position on unilateral sanctions hasn’t changed a bit: Ministry of Ex-
ternal Affairs,” The Hindu, April 29, 2022. https://www.thehindu.com/news/
national/indias-position-on-unilateral-sanctions-hasnt-changed-a-bit-minis-
try-of-external-affairs/article65364521.ece
9
All the BRICs, the four largest emerging market economies, declined to sup-
port Russia’s suspension from the Human Rights Council: China and Russia
voted against, Brazil and India abstained.
10
Taking Aim at the U.S. Dollar, the World Builds a Multipolar Trade-and-Pay-
ments Order,” Bill Campbell, January 2021. https://doubleline.com/wp-con-
tent/uploads/Taking-Aim-at-the-Dollar-in-a-Multipolar-Order-January-2021.pdf
5
 The Ruble as Weatherglass
of a Competing Trade-and-Finance Axis
Bill Campbell | August 2022
Bill Campbell
Portfolio Manager
International Fixed Income
Mr. Campbell joined DoubleLine in 2013. He is a Portfolio Manager
for the DoubleLine Global Bond Strategy and is a permanent
member of the Fixed Income Asset Allocation Committee. He
covers Developed Markets, Central & Eastern Europe, Middle East
and Africa (CEEMEA), and China. Prior to DoubleLine, Mr. Campbell
worked for Peridiem Global Investors as a Global Fixed Income
Research Analyst and Portfolio Manager. Previous to that, he spent
over five years with Nuveen Investment Management Company, first
as a Quantitative Analyst in their Risk Management and Portfolio
Construction Group, then as a Vice President in their Taxable Fixed
Income Group. Mr. Campbell also worked at John Hancock Financial
as an Investment Analyst. He holds a BS in Business Economics and
International Business, as well as a BA in English, from Pennsylvania
State University. Mr. Campbell holds an MA in Mathematics, with a
focus on Mathematical Finance, from Boston University.
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