The Russian ruble has rebounded to pre-invasion levels and going forward, capital controls and other ruble-supportive policies could keep the currency stable. After a sharp depreciation, the ruble rose to levels prevailing before the Ukraine conflict. Capital controls, the requirement to sell foreign currency to Russian companies, the demand to pay in rubles for energy, a large current account surplus, and tighter monetary policy all supported the ruble's rapid recovery.

 

It's unlikely that the controls will be completely removed any time soon. On the other hand, despite the recovery in the ruble, the Russian economy is likely to be under pressure for the foreseeable future. According to the IMF, the Russian economy may shrink by 8.5% this year and may experience a general decline in 2023. Western companies are withdrawing from the country and Russian companies are defaulting. Europe is now closer than ever to stopping gas purchases from Russia, and while this will have a blocking effect on the country's revenues, it is very likely to spread the axis of bilateral deceleration across Europe. Russia has made its first steps in ruble payments by cutting off gas flow to Poland and Bulgaria. The progress of the situation will force Europe to diversify its resources.

 

Inflation, on the other hand, increased by about 20% year-on-year, and higher prices are expected to put pressure on domestic activity. The Bank of Russia is likely to cut interest rates tomorrow as policymakers shift their focus to softening the blow to the economy. Disclosure of several operating indicators will reveal how the first full month of war and sanctions has affected the country's economy.

 

In addition to the Fed's tightening, economic problems in China and Russia will also put downward pressure on emerging market currencies. The developments in China are effective enough to shake the global growth. The Russian economy is poised to contract very sharply this year and will contribute to slower overall global GDP growth. Emerging market currencies typically underperform in a backdrop of slowing global growth. The risk of escalating geopolitical tensions between the US and China in 2022 is a phenomenon that may come to the fore after the Russia-Ukraine conflict.

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