Sanctions were supposed to crush the Russian ruble. So why did it just hit a 2-month high?

Since then, the currency has largely recovered, all but undoing the losses it suffered as a result of the war and subsequent sanctions. The appreciation has surprised experts who predicted the ruble would continue to fall, barring a ceasefire in Ukraine. 

After all, the Russian economy is expected to contract by as much as 15% this year, according to the Institute of International Finance. Ratings agencies have also downgraded Russian debt to junk status, arguing the country may be headed for “imminent” default. That kind of pessimism should, in normal circumstances, lead to a depreciating currency—but the ruble has proved to be resilient.

U.S. Secretary of State Antony Blinken told NBC’s “Meet the Press” on Sunday that Russian “manipulation” was the main cause of the ruble’s recent rebound after the Russian government restricted its citizens from transferring money abroad.

“People are being prevented from unloading rubles. That’s artificially propping up the value. That’s not sustainable. So I think you’re going to see that change,” Blinken said, adding that he is working every day to tighten sanctions and close loopholes that have allowed the ruble to appreciate.

From raising its benchmark interest rate to forcing exporters to swap 80% of their foreign currency revenues for rubles, Russia’s central bank has done everything it can to prop up the rubles’ value since the Ukraine invasion began, but it’s more than just manipulation that’s supporting the currency’s value.

It all comes down to oil and natural gas 

One of the most potent tactics Russia has used to buoy its currency is demanding payments for oil and gas exports in rubles.

While many European leaders have balked at the request and continue to pay in either euros or dollars, other countries have been eager to gobble up Russian energy exports at a discount. India, for example, has dramatically increased its Russian oil imports.

“Energy security [comes] first. If the fuel is available at a discount, why shouldn’t [we] buy it?” India’s finance minister, Nirmala Sitharaman, said at a CNBC event on Friday. “We have started buying…[and] have received quite a number of barrels. This will continue.”

Dr. Alexander Mihailov, an associate professor of economics at the University of Reading, in the UK, told Fortune that politicians should listen to economists and immediately stop importing Russian commodities. If they do, he argues the ruble would rapidly lose value, leading to devastating effects on the Russian economy.

But cutting off energy imports from Russia is easier said than done. Russia was the world’s largest natural gas exporter in 2021, and the second-largest crude oil exporter, according to the U.S. Energy Information Agency. And the country provides roughly 40% of Europe’s natural gas. 

Those flows can’t be stopped overnight, meaning the ruble will continue to be supported by oil and gas sales for the foreseeable future. This year alone, Russia is expected to receive a whopping $321 billion from its energy exports, Bloomberg reported last week.

A short-lived Russian “gold standard”

On March 25, Russia also began buying gold from banks at a fixed price of 5,000 rubles (roughly $61) per 1 gram.

Mihailov said the move effectively created a gold-based exchange rate of 81 rubles to $1 and helped to support the currency for a time. To his knowledge, the move also represented the first time a nation’s currency has been expressed in “gold parity” since Switzerland decided to end a similar policy in 1999.

“I think the link between the ruble and gold is intended to transfer strength and credibility from gold, which is a symbol of stability,” Mihailov said. “People still have this nostalgia to the gold standard…they perceive money as being tied down to gold, so it can’t inflate.”

Mihailov noted that the problem for Russia, if it enacts “gold parity,” is that it will also be forced to exchange rubles for gold at the 5,000 rubles per 1 gram price. If it does that, it could end up in a difficult situation where investors rush to withdraw gold from the central bank, leading to extreme destabilization in the country’s financial system.

Perhaps because of this, Russia reneged on its move to buy gold at a fixed rate on Thursday, citing a “significant change in market conditions.”

Capital controls and an illiquid market

Finally, in response to Western sanctions, Russia has imposed restrictions on the movement of funds to “unfriendly” countries, banned the sale of Russian stocks by foreign investors, and prevented citizens from exchanging rubles for foreign currencies.

These strict capital controls have left experts feeling skeptical about currency markets’ ability to effectively price the ruble, especially because there is no longer significant foreign exchange trading volume.

“It’s a completely artificial level and so very little credence should be given to it,” Cristian Maggio, the head of portfolio strategy at Toronto Dominion Bank in London, told Bloomberg on Thursday. “Almost no one can trade the ruble and those who really do, they trade at very different levels than what the screens report.”

Russian capital controls have led trading volumes to plummet to their lowest level in over a decade, Bloomberg reported.

Aaron Schwartzbaum, a fellow at the Foreign Policy Research Institute, a non-partisan Philadelphia-based think tank, pointed to the rapid drop in trading volumes for the ruble in a tweet last week arguing, “the ruble to dollar rate is not a reliable indicator of how sanctions are impacting Russia.”