1 USD was about 75 Russian Rubles before the war in Ukraine began. After the sanctions, Russian Ruble quickly declined and 1 USD skyrocketed to 139 Rubles. Now it is back to around 85. What are the reasons for it? As the West is proposing more and more sanctions, shouldn't it be declining even more?
It’s likely combination of several factors.
Some of it it’s because Russia has instituted capital controls (see Reuters). That means that Russians are limited or in some cases even prevented from exchanging rubles for other currencies. Exchange rates are ultimately determined by supply and demand. If people are not allowed to supply rubbles to the market, ruble supply shifts to the left and that, ceteris paribus, causes exchange rate to appreciate.
Russian central bank increased interest rates to 20% (see the economist) that strengthens the ruble.
Exchange rate often overshoots (see Dornbusch 1976). The initial depreciation in ruble likely did not just reflect fundamentals.
Some of it is also because Russia recently started using Gazprombank to partially evade sanctions on Russian central bank (see my answer here about that). Russia essentially requires other countries to pay for energy exports there and Gazprombank then converts the foreign currency to rubles, since it is not sanctioned.
It’s partially also because while the sanctions for sure hurt Russia they do not hurt much Russian energy exports. EU imports 26.9% of oil, 41.1% of gas and 46.7% of coal from Russia (see Eurostat). These important energy imports are not yet sanctioned and realistically there is no way how EU could manage to get some substitutes for that in near term. As long as Russia can continue its energy exports and as long as exports will be greater than imports (with which the sanctions help actually) Russia will be accumulating current account surplus which will help prop up the ruble.