Russia's currency, the Russian ruble, has recently been the subject of concern due to its depreciation. Some Western media reports have claimed that it is a sign of an impending economic collapse in Russia. However, upon closer inspection, we can conclude that the Russian ruble's depreciation is not as worrisome as some have suggested.

Before the Russia-Ukraine conflict, the Russian ruble was relatively stable, hovering around 70 to 80 Russian rubles to the U.S. dollar for over a year. This changed when the United States and Europe announced sanctions against Russia in February 2022, causing the Russian currency to plummet to around 126 Russian rubles to the U.S. dollar.

To combat these sanctions, the Russian Central Bank raised interest rates to an all-time high of 20 percent overnight which caused the Russian ruble exchange rate to undergo a V-shaped reversal, proving to be an effective measure.

The rapid appreciation caused by the interest rate hike led to the "overshooting" of the Russian ruble whereby the exchange rate rose to an excessively high level - a peak of approximately 50 Russian rubles to the U.S. dollar in June 2022 - before it gradually returned to normal.

This type of overshooting and subsequent correction is a common phenomenon in international financial markets caused by financial arbitrage. This means that when there are sudden changes in interest rates or other economic indicators, investors may quickly move their money across countries in search of higher returns, leading to rapid fluctuations in exchange rates. However, over time, these exchange rates tend to revert to their long-term averages as market forces stabilize.

As the Russian Central Bank gradually adjusts interest rates to normal levels – currently 7.5 percent - the Russian ruble's exchange rate has returned to pre-conflict levels. The future trajectory of the Russian ruble will be influenced by a variety of factors, including Russian economic performance, energy exports, and future monetary policies. Meanwhile, the trial run of the digital ruble is expected to become a new tool for maintaining the stability of the Russian ruble's value.

By reviewing how the Russian Central Bank has successfully weathered the crisis over the past year, we can see that the Russian financial system has withstood the financial attacks launched by the United States. Ironically, Washington's excessive use of the U.S. dollar as a weapon for imposing sanctions could have backfired, weakening the U.S. dollar's credibility.

Overall, while the depreciation of the Russian ruble has been a topic of concern in the media, it is important to understand the context and recognize that the situation is a normal market correction. By considering the various factors that affect the Russian ruble's exchange rate and observing the Russian Central Bank's measures to stabilize the Russian ruble's value, we can see that there is no reason to fear a collapse of the Russian economy.

(Cover image via CFP)