LONDON - The rouble has staged a lightening-fast recovery to levels last reached in the days before Russia invaded Ukraine, defying predictions that the war would launch it into freefall.
The dramatic rebound - the currency nearly halved in value in seven trading sessions following the Feb. 24 invasion - is partly down to a genuine improvement in Russian finances as energy export revenues grow and imports shrivel.
But using it as evidence that Russia's sanctions-savaged economy is out of the woods would be at best misleading.
The currency is also being artificially inflated by capital controls and, with the country's gross domestic product predicted to shrink 10%-15% this year, Russians are quickly getting poorer as soaring inflation devours their earnings.
"This (rouble recovery) shouldn't be taken to be the market's view on the medium to longer-term outlook for Russia," said Ulrich Leuchtmann, an analyst at Commerzbank.
"Market forces cannot drive the rouble in the way they can the euro or dollar," he added, noting that while Russian demand for foreign exchange was falling, speculators who use currencies to bet on a country were now absent.
Since the war started, the rouble has split into an onshore market for local institutions, and an offshore one for Western banks and investors to trade with each other and entities not subject to sanctions. Trading volumes have dried up on both.
JPMorgan said this week that Western banks had scaled back trading and credit lines to Russian entities, creating "a friction between offshore and onshore trading".
However, as the rouble has recovered, the price gap between the markets has shrunk.
According to Refinitiv data, the offshore rouble this week was quoted as strong as 75 per dollar , around where it traded on the eve of the invasion that Russia terms a "special military operation".
On March 7, it hit a record low of 150 per dollar.
In onshore markets, the rouble on Friday briefly hit 80.33 per dollar, levels last seen pre-invasion on Feb. 23 and well clear of its March 10 low of 121.5.
The White House on Thursday said Moscow was artificially "propping up" the rouble, and the role of official measures in the recovery is easy to pinpoint.
In response to the sweeping sanctions, Russia ramped up interest rates to 20%, restricted local firms' access to foreign currency cash, barred citizens from withdrawing more than $10,000 in foreign currency for six months, and stopped banks from selling hard currency in cash.
Foreign investors have been banned from exiting securities, limiting the scramble to dump roubles, and President Vladimir Putin on Thursday demanded that foreign buyers pay in roubles for Russian gas from April 1.
"European countries are not willing to do this, because if it is successful and European countries agree to this, it would have a supportive impact on the rouble market," said Danske Bank chief analyst Minna Kuusisto.
Analysts generally view Putin's demand as an attempt to undermine sanctions and bolster the currency, and Kuusisto noted that Russian gas sellers in the past did not fully convert foreign exchange income into roubles.
...BUT TRADE-DRIVEN GAINS TOO
Part of the rouble recovery is however genuine: currencies can perform well even if an economy is tanking, as long as the balance of payment position is improving.
Analysing tanker traffic data, the Institute of International Finance (IIF) estimates Russia's March oil export earnings will total $12.3 billion - up sharply on March 2021 as energy prices soar.
Collapsing imports could see the current account surplus double from 2021 to $200-$240 billion this year, the IIF also estimates.
IIF chief economist Robin Brooks acknowledged questions about the rouble move were legitimate given capital controls, though he deemed the recovery "genuine", pointing to fellow oil exporter Kazakhstan's currency, which has recouped half its post-invasion losses.
In the longer term, the rouble's fortunes look less favourable.
Ostracism from the West is likely to mean fewer buyers for Russia's exports, and should oil prices tumble the rouble will struggle. With half its $640 billion of gold and foreign exchange reserves frozen, Russia has less much scope to defend the currency.
(Reporting by Tommy Reggiori Wilkes Editing by Karin Strohecker and John Stonestreet)