Russia Cuts Rates to Rein in Ruble’s Rapid Rise


Russia’s central bank has cut interest rates for the third time since early April, targeting a meteoric rally in the ruble that has seen the currency more than double against the dollar since its March nadir.

The Bank of Russia on Thursday lowered its main interest rate to 11% from 14%. The cut marked a new unwind from a 20% rally earlier this year at a time when authorities were trying to stabilize the ruble after it fell at the start of Russia’s invasion of Ukraine.

The race to lower borrowing costs is a sign that Russian authorities are increasingly uneasy about the rouble’s rapid ascent, investors and economists said.

The strength of the ruble not only belies a struggling national economy, which is expected to slide into a severe recession this year, but it also puts pressure on public finances by lowering the local currency value of dollar-denominated oil and gas revenues, say -they.

The currency strengthened to 51 to the US dollar this week, a level last seen in 2015, after briefly dropping above 150 in early March. It fell back to around 60 after the rate cut.

“Such an extraordinary appreciation starts to be a financial stability issue, not to mention the risks to economic activity,” said Sofya Donets, economist at Renaissance Capital. In addition to hurting the government’s fiscal balance, a strong ruble would make life difficult for some Russian exporters, Donets said, adding that the unexpected rate cut was “clearly driven by the strengthening ruble.”

The rebound since March, which has made the ruble the world’s best-performing currency this year, has been fueled by strict capital controls that limit Russians’ ability to buy foreign currency. It was also boosted by a collapse in Russian imports caused by unprecedented economic sanctions combined with a steady stream of energy exports.

According to Elina Ribakova, Deputy Chief Economist at the Institute of International Finance.

“Although it is not a free market determined exchange rate, the stability of the ruble is at the same time “real”, in the sense that it is driven by the unprecedented current account inflows of Russia,” she said.

Ruble appreciation has helped contain Russian inflation, which has begun to ease in recent weeks, slowing for the first time since last summer in the week to May 20, statistics show. State. Annual inflation slowed to 17.5 percent as of May 20 from 17.8 percent in April, he said.

The central bank said on Thursday that there had been a “significant decline in inflationary expectations among people and businesses”, saying the stronger currency was helping to ease price pressures in the economy. He expects inflation to slow to 5-7% next year and 4% in 2024. He had previously estimated this year’s inflation at 18-23%.

Line chart of rubles per dollar showing Russian ruble rebounding strongly from post-invasion low

However, a stronger currency is not a sign of the economy’s resilience to Western sanctions, according to Polina Kurdyavko, head of emerging markets at BlueBay Asset Management. Instead, she argues, the ruble’s rally is actually a sign of the effectiveness of sanctions in isolating Russia from the global economy.

Along with the exodus of foreign companies from Russia, companies including Russia’s largest automaker Avtovaz have been forced to halt production due to a lack of imported components.

“What does ruble strength really mean? Certainly not that the economy is healthy,” Kurdyavko said. “Growth will be deep in negative territory. Inflation is in double digits. It is clear that the pain is felt. At the most basic level, businesses close because they can’t import anything.

In this environment, the Bank of Russia will have to exercise caution to try to stem the rise of the currency, according to Ribakova.

“Russia’s central bank is trying to ease capital controls because they believe the ruble is too strong,” Ribakova said. “But the central bank is in a difficult situation; if they continue to slack off, they could open the floodgates for capital flows out of the country. In previous crises, 200 billion dollars left the country in a few months. »

“The bottom line is that as long as the ruble is stable and Russia has a current account surplus in the short term, the economic fallout from invading Ukraine will undermine the Russian economy in the long term.”


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