The Art of Currencies in the Ukrainian War – Analysis – Eurasia Review

By Dr. Diana Galeeva *

Following the imposition of Western sanctions, Russian President Vladimir Putin began demanding payments in Russian rubles for gas sold to “unfriendly” states from March 31. This was partly an affirmation of the importance of Russian energy supplies to other countries and partly an effort to maintain the value of the ruble in the face of various economic sanctions that have severely hampered Russian foreign trade and assets. After two months, to what extent has this proven to be an effective counter-tool and can the ruble emerge as a solid alternative to the dollar or the euro? What is the “art” of national currencies in the context of the war in Ukraine?

To date, these measures have had mixed effects, judging by the reaction of Western countries. Some companies or countries had to follow the Kremlin’s requirements. According to a proposal from the European Commission, companies are supposed to transfer their payments in dollars or euros to a bank account in Russia, with the currency then converted into rubles. Payments should be finalized once the foreign currency is deposited in the Russian bank, rather than after it has been converted. At least four gas buyers in Europe have already started making payments to Russia in rubles via this complicated method.

Due to their economic interdependence, some states that reacted very harshly to Russian actions had to follow this path. The UK, for example, has repeatedly condemned the “invasion”, in part because of a very long-running crisis in UK-Russia relations. But despite strong rhetoric coming from London, the UK is allowing gas payments to sanctioned Russian banks until May 31. The Kremlin’s demands are certainly calculated and it has taken advantage of the interdependence of states (especially on energy issues), whatever is suggested by the headlines of politicians in other countries.

Not everyone’s position is as hesitant as the UK’s, however, as many European states have begun to pursue alternative routes to help each other refuse the Kremlin’s demands. Finland reportedly lost its main gas supply last week after refusing to make ruble payments, but supplies continue to arrive via a pipeline from Estonia.

Another example is that Bulgaria and Poland refused to pay in rubles in April, but Greece promised to help Bulgaria. This points to the limits of the effectiveness of Putin’s action, which in any case is likely to have less impact in the longer term as such coordinated responses become established.

Given this mixed effectiveness, it is relevant to wonder what will happen to the value of the ruble. At the start of the conflict in Ukraine, its value fell off a cliff – from around 85 for one euro last year to over 140. But thanks to an intervention by the Russian central bank, it rose again to 94.1 for one euro. It has now risen to around 60 for one euro. Similarly, on March 9, one US dollar was worth 138 rubles, but on Monday it had fallen below 60.

Against all expectations, in early May, the Russian ruble was recognized as the best performing currency in the world in 2022, up 11% against the dollar. According to data tracked by Bloomberg, the ruble was the biggest gainer among the 31 major currencies due to a series of capital controls imposed domestically to prop up the economy and offset Western sanctions.

This force clearly has symbolic importance, but also economic limitations, since relatively few investors outside of Russia can profit from rising currencies. Nevertheless, at the moment the ruble has proven its worth based on these indicators. The next question is what does this actually mean in the context of the current geopolitical rivalry.
Interestingly, the role of global currencies in Ukraine predates the current conflict, dating back to 2014. A so-called de-dollarization policy began then, when Russia and China formed what some pundits have called a financial alliance following Moscow’s estrangement from the West over its annexation of Crimea.

Overcoming the dollar in trade agreements has become a necessity in an attempt to circumvent US sanctions against Russia. In 2014, Beijing and Moscow signed a three-year currency swap deal worth 150 billion yuan ($24.5 billion). This agreement allowed each partner to have access to the dollar without having to buy it on the foreign exchange market. In 2019, another milestone occurred when the two countries signed an agreement to swap the dollar for their national currencies in any global settlement between them. These agreements also called on both parties to develop alternative payment methods to the US-dominated SWIFT network to guide trade in rubles and yuan.

Seen in this context, Moscow’s demand that other states pay for gas in rubles is part of its ongoing efforts to undermine the US dollar in order to challenge Washington’s global economic leadership. But there is still a long way to go before the dollar is replaced by the ruble as the global currency of choice, beyond specific areas of agreement or interstate agreements.

A slightly different question may be asked when considering “Russia-friendly” states, rather than Europe and the West. Here, the ruble has clearer prospects for retaining its value and utility. Furthermore, the current momentum could provide new opportunities for the Chinese yuan to move up the reserve currency ladder. Although usually not the most visible aspect, Putin’s demands have highlighted the artistry of currencies in a war and their effectiveness in negotiating geopolitical rivalries.

The Ukraine crisis will have many broader and longer-term outcomes for the geopolitical roles and status of every actor in the international system, whatever happens on the ground. Strategic decisions must therefore often look beyond the immediate points of conflict or profit and consider the impact on global systems. The management of national currencies can exploit the interdependence of supposed enemies and create more subtle opportunities downstream. Sun Tzu would no doubt have endorsed such foresight in “The Art of War,” his masterpiece on war strategies, including the importance of intelligence and guessing your opponent.

  • Dr Diana Galeeva is a visiting professor at St. Antony’s College, University of Oxford. Dr. Galeeva is the author of two books: “Qatar: The Practice of Rented Power” (Routledge, 2022) and “Russia and the GCC: The Case of Tatarstan’s Paradiplomacy” (IB Tauris/Bloomsbury, 2022). She is also co-editor of the collection “Post-Brexit Europe and UK: Policy Challenges Towards Iran and the GCC States” (Palgrave Macmillan, 2021). Twitter: @diana_galeeva

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