THE BELL WEEKLY: Ruble woes

Hello! This week our top story is about the falling Russian ruble, which last week saw its worst-performing week this year. We also look at why many Russian officials are now blocked from traveling abroad and the defection of a high-ranking security officer who was involved in protecting President Vladimir Putin.

The ruble suffers its worst week of 2023

Just under a year ago, the Russian ruble was named the best performing currency in the world. As a result of currency controls introduced by the Russian authorities and a sharp drop in import volumes, it rose in value after the invasion of Ukraine to levels not seen since 2014. Now, however, those boom times are gone. Last week, the ruble fell five days in a row.

• Despite the unexpected recent announcement by oil cartel OPEC+ that they were suddenly cutting production — triggering oil price rises — the Russian currency in April has been displaying the worst dynamics of any developing world currency. There are likely several reasons for the ruble’s fall.
• Above all, it seems to have been caused by oil major Shell exiting the huge Sakhalin-2 gas project. The company is not only set to take out more than $1 billion in assets from Russia, but also claim part of its dividend. In pre-war times, the Russian currency market would barely have reacted to such an outflow. Cut off from global financial systems as a result of the Ukraine war, however, it is suffering from greatly reduced liquidity.
• The ruble’s problems may also be linked to new budget rules introduced in January. Budget rules are the mechanism Russia uses for distributing revenues from commodity exports. If oil and gas revenues go above a certain level, Russia purchases Chinese yuan with the surplus. If revenues are lower, Russia sells yuan to support the ruble.
• It emerged on Wednesday that, this month, the Finance Ministry reduced sales of the yuan by about 40% because of a rise in oil and gas revenues the previous month. Against a backdrop of a shortage of yuan in the banks, this could further weaken the ruble, according to Natalia Orlova, chief economist at Alfa Bank.
• The Russian authorities themselves attribute the falling ruble to a reduction in the inflow of foreign currency from exports coupled with a rise in imports. Finance Minister Anton Siluanov said he hopes that the Russian currency will soon rise due to the growing oil prices. However, there will be some delay before this additional revenue hits the market.
• Analysts are not rushing to revise their forecasts for the rubles despite the turbulent week on the currency market. They still see the ruble rate in 2023 in the region of 75-80 rubles to the U.S. dollar. But the big issue is not the price against the dollar — it’s the volatility. The implied monthly volatility for the ruble (the indicator of how the market anticipates future exchange rate fluctuations) hit 30% last week. That’s significantly worse than toxic third-tier securities or crypto-currencies.

Why the world should care

In one of her first interviews as chairman of the Central Bank, Elvira Nabiullina defined one of the hallmarks of stability as “a strong economy that has a strong exchange rate.” That seems a long way off. In the long term, ruble volatility weakens the currency’s usefulness as a means of saving or making payments — and makes investors very wary.

High-ranking Russian officials face travel ban

Since the war started, Russian officials and employees of state-owned companies have found it difficult to travel. The reason is not only Western sanctions, even though these have affected many. Instead, Russian officials and employees at state-run organizations have been subjected to stringent new travel restrictions.

• Recent changes mean that all top officials – from ministers down to heads of department – can only travel abroad with the express permission of Prime Minister Mikhail Mishustin. And that permission is only given when there is a clear operational need, according to sources who spoke with The Bell.
• At the same time, Kremlin employees have no such restrictions, according to two of The Bell’s sources. One of them attributed the difference to Mishustin’s “special zeal.” However, most Kremlin staff “are not even trying” to go anywhere, broadcaster Current Time reported in March citing a source close to the Kremlin. Another of the TV channel’s contacts pointed out that several Kremlin staffers have traveled to “neutral” countries in the last year and their trips were signed off by Anton Vaino, President Vladimir Putin’s chief of staff.
• There are several other indications that Russian officials from other agencies and managers in state-owned companies are finding it more difficult to travel abroad. Some officials have been obliged to hand over their passports. And there were media reports that, over the New Year holidays, both national and regional-level officials were banned from leaving Russia.
• The Moscow Times reported last month that the Federal Security Service (FSB) maintains a database of officials, governors and other state employees who must obtain special permission in order to leave the country. “An iron curtain for those associated with the state is… in place,” a senior Russian government official said at the time.
• Even middle-ranking officials and managers at state companies that do not have access to classified information are also being forced to stay home, according to a recent report in the Financial Times.
• Putin’s spokesman Dmitry Peskov told the FT that restrictions on foreign travel had been tightened for workers in sensitive industries. “In some places [the rules] are formalized, in other places they depend on specific decisions regarding specific employees,” he said.

Why the world should care

Before the war, it was only Russian security officials (who could only visit “friendly” nations like Belarus or Cuba) and intelligence officers (generally barred from foreign travel) who had travel restrictions. However, it now seems clear that these travel restrictions are being applied to run-of-the-mill officials and managers of state-owned companies. It’s hard not to see the reason for this as growing paranoia in the Kremlin.

Security officer who fled Russia tells of Putin’s growing isolation

Dossier, an investigative center linked to former Russian oil tycoon Mikhail Khodorkovsky, last week published an interview with a captain in the Federal Guards Service (FSO) who fled abroad in protest at the war. Gleb Karakulov served for 13 years in the FSO, which is responsible for the president’s personal safety. Karakulov's role involved providing secure communications for the head of state on work trips in Russia and abroad. Although he never once spoke to Putin during his career, Karakulov made almost 200 trips and understands very well how the president has become ever more isolated from the outside world.

• Karakulov was only a couple of years away from retirement. However, he said that he “could not remain in the service of this president” after the war broke out and regards Putin as a war criminal. Karakulov “fled” from the FSO in October during a trip to the Kazakh capital, Astana, where Putin was taking part in the “Russia – Central Asia” summit. Karakulov, along with his wife and daughter, flew from Astana to Istanbul. In early November, the apartments of his relatives in Russia were apparently searched and the former officer was accused of desertion. Now, he faces up to 15 years in jail if he ever returns to Russia.
• Putin does not use the internet or a mobile phone and gets all his information “only from people who are close to him,” according to Karakulov.  When preparing a “residence” (like a hotel suite) for a visit from the Russian president, he said, there is a requirement that Russian TV channels must be available.
• According to Karakulov, Putin remains in self-isolation and those who plan to meet him are expected to spend two weeks in quarantine, even if the event is to last less than 20 minutes. “Everyone is at a loss as to why this is still going on,” said the FSO officer. He believes that the president is afraid for his health, although he has no “super critical” problems. In total, since 2009, Putin has canceled just a couple of trips due to illness, according to Karakulov.
• Karakulov also said that on every foreign trip, Putin brings a “talking booth,” a 2.5m high cube with a workspace and a telephone through which you can speak without fear that the conversation will be intercepted by foreign intelligence.
• Putin has changed a great deal since 2009, Karakulov told Dossier. “In terms of behavior, they are two different people,” he said in the interview. “We remember how, when the former FSB director became Prime Minister, and then president, he was so active, so energetic. Of course, until 2020 he was still just as active, judging by the many business trips he made. But now he is very closed off. He is putting up all possible barriers between himself and the world, maintaining the same quarantine, the same lack of information. His perception of reality is distorted.”

Why the world should care

Dossier describes Karakulov as the highest-ranking intelligence officer to leave the country since the war broke out. According to Karakulov, Putin has the support of almost all his colleagues, casting doubt on the theory that he could be overthrown in a coup.