The Art Of Currencies In The Ukraine War – Analysis

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 assertion 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 the various economic sanctions that have severely hampered Russian foreign trade and assets. After two months, to what extent has this proved to be an effective counter tool and can the ruble emerge as a strong alternative to the dollar or euro? What is the “art” of national currencies in the context of the Ukraine war?

To date, these measures have had mixed effects, judging by the response from Western countries. Some companies or countries have had to follow the Kremlin’s demands. Under a European Commission proposal, companies are expected to transfer their payments in dollars or euros to a bank account in Russia, with the currency then converted to rubles. Payments are to be finalized once the foreign currency is deposited in the Russian bank, rather than after it is converted. At least four gas buyers in Europe have already begun making payments to Russia in rubles via this convoluted method.

Due to their economic interdependence, some states with very severe responses toward Russia’s actions have had to follow this path. The UK, for example, has repeatedly condemned the “invasion,” in part due to a very long-running crisis in UK-Russia relations. But despite the 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 been able to take advantage of the interdependence of states (especially over energy concerns), whatever is suggested by the headline pronouncements of other countries’ politicians.

Not everyone’s position is as tentative as the UK’s, however, as many European states have begun to follow alternative routes to help each other refuse the Kremlin’s demands. Finland was last week reported to have lost its main gas supply after refusing to make payments in rubles, 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 indicates the limits of the effectiveness of Putin’s move, which in any case is likely to have a diminished impact over the longer term as such coordinated responses become more established.

Bearing in mind this mixed effectiveness, it is pertinent to consider what will happen to the value of the ruble. At the beginning of the Ukraine conflict, its value fell off a cliff — from about 85 to the euro last year to more than 140. But due to an intervention by the Russian central bank, it recovered to 94.1 to the euro. It has now risen to about 60 to the euro. Similarly, on March 9, one US dollar was worth 138 rubles, but by Monday this had dropped below 60.

Counterintuitively, at the beginning of May, the Russian ruble was acknowledged as the world’s best-performing currency in 2022, up 11 percent against the dollar. According to data tracked by Bloomberg, the ruble was the largest gainer among 31 major currencies due to a slate of capital controls imposed domestically to prop up the economy and offset Western sanctions.

This strength clearly has symbolic importance, but also economic limitations, since relatively few investors outside of Russia can make profits from the currency rally. Nonetheless, for the time being, the ruble has proved its value based on these indicators. The next question is what this actually means in the context of the ongoing geopolitical rivalry.
Interestingly, the role of world currencies in connection with Ukraine predates the current conflict, going back to 2014. A so-called de-dollarization policy then began, when both Russia and China formed what some experts called a financial alliance following Moscow’s estrangement from the West over its annexation of Crimea.

Overcoming the dollar in trade settlements became a necessity in trying to get around 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 obtain access to the dollar without having to buy it on the foreign exchange market. In 2019, another milestone occurred when the two countries signed a deal to swap the dollar for their national currencies in any global settlements between them. These arrangements also called for the two sides to develop alternative payment methods to the US-dominated SWIFT network for guiding 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 it is a long way from here to the dollar being replaced by the ruble as the global currency of choice, beyond specific agreement areas or inter-state deals.

A slightly different question can 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. Further, current dynamics might offer new opportunities for the Chinese yuan to move up the reserve currency ladder. Though not usually the most visible aspect, Putin’s demands have brought into view the art of currencies in a war and their effectiveness in negotiating geopolitical rivalries.

The Ukraine crisis will have many wider and longer-term outcomes for the geopolitical roles and status of each player in the international system, no matter what happens on the ground. Strategic decisions therefore often need to look beyond 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 subtler opportunities further down the line. Sun Tzu would no doubt have approved of such far-sightedness in “The Art of War,” his masterpiece on the strategies of war, not least the importance of intelligence and keeping your opponent guessing.

• Dr. Diana Galeeva is an academic visitor to St. Antony’s College, Oxford University. 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” (I.B. Tauris/Bloomsbury, 2022). She is also a co-editor of the collection “Post-Brexit Europe and UK: Policy Challenges Towards Iran and the GCC States” (Palgrave Macmillan, 2021). Twitter: @diana_galeeva