Paul Krugman considers the recovery of the Russian ruble in his latest New York Times column:
The question is why Russia is willing to defend its currency at the expense of all other goals. After all, the draconian measures taken to stabilize the ruble will probably deepen what is already looking like a depression-level slump in Russia’s real economy, brought on by surprisingly wide and effective sanctions imposed by the free world (I think we can resurrect that term, don’t you?), in response to its military aggression.
Let’s take a brief excursion into economic theory here. One of the classic propositions in international economics is known as the “impossible trinity.†The idea is that there are three things a country might want from its currency. It might want stability in the currency’s value in terms of other currencies — for example, a stable value of the ruble in dollars or euros — to create greater certainty for businesses. It might want free movement of funds across its borders, again to facilitate business. And it might want to retain freedom of monetary action — the ability to cut interest rates to fight recessions or raise them to fight inflation.
The impossible trinity says that you can’t have it all, that you have to choose two out of three. You can, like Britain, have open capital markets and independent monetary policy, but that means allowing the value of the pound to fluctuate. You can, like countries that have adopted the euro, have free movement of capital and currency stability, but only by giving up monetary independence. Or you can, like China, have a stable currency and your own monetary policy, but only by maintaining capital controls. (Those controls, by the way, are one main reason the renminbi isn’t going to rival the dollar as a global currency for the foreseeable future.)
So what’s puzzling about Russia? Normally a country can choose two out of three legs of the trinity; Russia has decided to take only one. It has imposed severe capital controls, but it has also sacrificed monetary independence, drastically raising interest rates in the face of a looming recession.
His explanation for why the Russian government has chosen stability rather than free movement of funds or the ability to cut interest rates is that the government has near total control of information within the country. My guess is that by raising interest rates as much as they have as fast as they have they think they have retained the ability to cut interest rates if necessary and their needing to raise interest rates beyond 20% is unlikely. Almost the opposite of our Federal Reserve.
Yes, it’s a fallacy that because the Russian central bank chose to raise rates instead of lowering rates; it sacrificed monetary policy independence.
Relating back to the war; it is rare for governments to increase interest rates in a war; it makes financing a war more difficult. With a caveat; Russia clearly had been preparing for the scenario; building up reserves and keeping the Ruble at an artificially low level for years before the war. If Russia’s exports continue to exceed imports; they may feel no pressure to lower interest rates and risk hyperinflation.