Russia-Ukraine Crisis: Impact on Russia’s Foreign Exchange Rate

Abstract
The foreign exchange market plays a crucial role in a country’s economy. Certain factors affect
the rate of foreign exchange such as inflation rate, interest rate, government debt, balance of
payments, terms of trade, political stability, recession, and speculation.

For this article, the author will examine an exceptional circumstance as that of the Ukraine-
Russia’s on-going crisis and its impact on the foreign exchange market in Russia. It will
investigate whether the economic sanctions imposed on Russia has hindered the foreign
exchange market? How has the trade restrictions affected interest and inflation rate which in turn
will affect Russia’s rate of foreign exchange?

Key Words: Foreign Exchange, Interest rate, Inflation Rate, Russia. Rubles

Introduction
The foreign exchange market is a market where one can exchange the currency of one country to
the currency of another country. Several factors can have a massive impact in this market, such
as inflation rate, rate of interest, country’s balance of accounts, government debt.

For instance, the inflation rate of a country will determine whether the value of its currency will
appreciate or depreciate. Changes in the rate of interest will also affect the country’s currency
value and the foreign currency exchange rate. Increases in interest rates cause a country's
currency to appreciate because higher interest rates provide higher rates to lenders which will
result in more foreign capital. This will then cause an increase in exchange rates.

Moreover, a country’s balance of account can fluctuate its currency exchange rate. If there’s
more exports, then import there will be an appreciation of the local currency as more foreign
capital is entering the country. In addition to that, the amount of debt a country has also plays a
role in the foreign exchange market. A country with government debt is less likely to acquire
foreign capital, leading to inflation. Foreign investors will sell their bonds in the open market if
the market predicts government debt within a certain country.
At times, even exceptional circumstances such as COVID-19 which took the world by storm and
even wars such as the one going on presently between Russia and Ukraine can affect the foreign
exchange market.

Russia and the Forex Market

Russia announced its full-scale invasion of Ukraine on the 22 nd of February and, at present the
war is still on going with Ukraine struggling to fight off Russia and Russia failing to capture the
remainder of Ukraine. This struggle had created some tumultuous changes in the forex market
globally.

Fig.1.0 shows the exchange rate from USD to RUB from the start of the war on 22 nd Feb to 7th Mar when the
exchange rate was at its highest

DATE USD $ RUB ₽

nd
22 Feb 2022 1 78.60
24th Feb 2022 1 84.05
28th Feb 2022 1 101.04
1st Mar 2022 1 105.04
7th Mar 2022 1 135.50

Fig.1.1 shows the exchange rate from Euro to RUB from the start of the war on 22 nd Feb to 7th Mar when the
exchange rate was at its highest

DATE Euro € RUB ₽

22nd Feb 2022 1 89.01
24th Feb 2022 1 94.06
28th Feb 2022 1 113.36
1st Mar 2022 1 116.86
7th Mar 2022 1 147.04

The war had created an outrage around the world which resulted in over 45 countries imposing
economic sanctions on Russia. The United States being a leading member initiated the move of
banning all Russian exports such as that of oil, gas, and wheat which they are known for. Europe
heavily relies on Russia for oil and gas; it is said that a total of 35% of gas and oil are from
Russia, however, with the ban Russia will lose out on this revenue which is approximately $108
billion.
Furthermore, US, Japan and other Western countries have taken another step by restricting
access of some Russian banks to the SWIFT global bank system. This is a network which creates
links between banks to create a private and secure transactions by acting as a carrier of
information regarding payment instructions between two financial institutions. Restriction on
central Russian banks had deterred it from accessing $600 billion from its reserve which it could
have used to help its currency to appreciate after its decline in value.

As a result of such measures, inflation in Russia rose however, Western countries like the US
and the UK also faced high inflation rate with the ban on Russian imports negatively impacting
them.

Month Inflation Rate

Feb 2022 9.2%
Figure 1.2 shows the inflation rate of Russia between
Mar 2022 16.7%
the months of Feb when the war started to May of
Apr 2022 17.8% 2022
May 2022 17.1%

Findings
Economic sanctions rarely work when imposed unilaterally however, when imposed
multilaterally can have a higher probability in having a negative impact. The first few months in
Russia during the war had resulted in higher inflation rate due to the heavy bans on Russia’s
export. Inflation rate arose and peaked in April of this year with 17.8%. Russian currency
depreciated which could be observed with the exchange rate of the currency with USD and Euro.
The highest exchange rate for both USD and Euro with RUB was on the 7th of March.

Fig. 1.3 shows the peak exchange rate for RUB with USD and Euro
 Highest Exchange rate on 7th March - USD to RUB
$1 = ₽135.50
Highest Exchange rate on 7th March- Euro to RUB
€1 = ₽147.04

Conclusion
There’s a strong relationship between a country’s inflation rate, forex rate and interest rate. The
first few months of the war have shown that there is in fact a high inflation rate, this caused the
country’s currency to depreciate, which in turn caused the interest rates to go down. Exports of
energy has been Russia’s powerhouse in running its economy, with its dealings with the Western
countries destroyed, initially (the months examined in the paper) showcase that there is a lack of
foreign capital coming into the country.

However, the present scenario is different as Russia has defeated the purpose of these sanctions
by encouraging trade with Eastern countries such as that of China and India. This has been vital
for Russia in keeping its economy above the water.

References
Russia-Ukraine War: The 6 Charts to Know What’s Happening in Financial Markets
www.economictimes.com

Russia-Ukraine War Effect on the Forex Market

https://moderndiplomacy.eu

Ruble Sinks 26% to 105.27 per Dollar After SWIFT Sanctions

https://www.business-standard.com

The Fall and Rise of the Russian Ruble – Foreign Policy

https://foreignpolicy.com

Monthly Inflation Rate in Russia 2021-2022

https://www.statista.com