Russia's ruble has rallied nearly 40% since the war in Ukraine began. That could be bad news for Putin. (2024)

• The ruble has gained against the dollar after collapsing immediately after the Ukraine invasion.
• Moscow's anti-crisis measures — such as hiking rates to 20% — may have squeezed the currency too high.
• Its rally means Russia's income from dollar-linked oil and gas sales is falling, a likely hit to its economy.

When a currency is growing in value, it's typically seen as a sign of economic strength that reflects investors' confidence and boosts a country's trade balance.

But the appreciation in the ruble since March could be bad news for Russia and its president, Vladimir Putin.

The Russian currency has jumped nearly 40% against the dollar since Putin's forces invaded Ukraine on Feb. 24, with $1 worth 60.28 rubles at last check Friday.

"Moscow's economic policy response was focused on boosting local confidence and controlling capital outflow, but not aimed at persistently strengthening the ruble," ING's chief Russia economist, Dmitry Dolgin, told Insider.

"The ruble's fast recovery to pre-war levels was welcome, but the subsequent appreciation is actually uncomfortable."

The ruble cratered to an all-time low against the dollar in the immediate aftermath of the invasion, as Western countries rushed to place sanctions on Russia's banking system and freeze its foreign-exchange reserves.

But Moscow's subsequent anti-crisis measures — which included hiking interest rates from 9.5% to 20% and unlimited liquidity injections for banks — may have actually squeezed the currency too high, according to analysts.

A strong ruble hurts Russia by eating away at its income from oil and gas exports, which feeds into around 45% of its federal budget, according to the International Energy Agency.

Both those commodities are valued in dollars, or other non-ruble currencies, on international markets. So when Russia goes to convert its revenues back into rubles, to spend on things like pensions, a high exchange rate means it's losing money.

"From a budget perspective, the ruble's recent appreciation lowers dollar-linked, but ruble-denominated, oil and gas taxes," Dolgin said.

Russian policymakers are now scrambling to deliberately weaken the ruble. In July, the Bank of Russia slashed interest rates by 150 basis points to 8%, bringing them below pre-war levels.

"We're seeing the central bank cutting rates aggressively in an attempt to ease the pressure on the currency," Craig Erlam, a market analyst at foreign-exchange broker OANDA, told Insider.

Meanwhile, Moscow is reportedly considering a plan to spend up to $70 billion buying Chinese yuan and other "friendly" currencies, which it hopes will curb the ruble's rise.

But its ability to find foreign-exchange trading partners has been hampered significantly by Western sanctions, according to ING's Dolgin.

The sanctions froze about half of all of Russia's currency reserves, valued at $640 billion. Plus some Russian banks were banned from the SWIFT financial messaging system, which is underpins international money transfers, including for trade.

The ruble's rise has led to "talk about potential reinstatement of the government's FX purchases in friendly currencies, and potential state FX lending to friendly BRICS countries," Dolgin told Insider.

"Those attempts have been unsuccessful so far, as Russia's capital account remains blocked by external sanctions," he added.

That means the ruble's rapid appreciation could actually be a sign that Western sanctions are ultimately disrupting the Russian economy, in a complete inversion of the Kremlin's official line.

Read more: Wall Street predicted Russia's economy would collapse after it invaded Ukraine. These 3 charts show that hasn't happened.