Russia Cuts Interest Rates as Ruble Recovery Brings Some Relief

At an extraordinary meeting, the Central Bank of Russia cut interest rates to 11% from 14% and said further cuts could follow. Rates were raised by 20% in the immediate aftermath of Russia’s invasion of Ukraine in February, as the bank tried to prevent Western sanctions from triggering a financial crisis.

“Inflationary pressure is easing against the backdrop of the dynamics of the ruble exchange rate, as well as a noticeable decrease in inflationary expectations of the population and businesses,” the CBR said in a statement. He said he expects inflation to fall to 5-7% this year, down from about 17.5% this month.

The ruble collapsed to a record low of about $135 per US dollar after the invasion, when the West froze about half of Russia’s $600 billion in foreign exchange reserves. Hundreds of transnational corporations left the country, and Russia was banned purchase of key Western technologies and services.
But the Russian currency has since rebounded and, according to Reuters, has performed the best in the world this year, helped by capital controls aimed at forcing businesses and investors to buy rubles, as well as skyrocketing global energy prices. For one US dollar now you can buy about 62 rubles.

Western efforts to cut Russia’s energy imports have been slow, and rising oil and gas prices have added to the Kremlin’s coffers.

“The key point is that high oil and gas revenues provide policymakers with a lifeline to steer clear of emergency economic measures,” William Jackson, chief emerging markets economist at Capital Economics, said in a research note.

“Against this backdrop, further easing of capital controls and additional rate cuts are likely,” he added.

Russian President Vladimir Putin spent the years leading up to the war trying to build a “fortress economy” by accumulating reserves that could be used in the event of an emergency. On Wednesday, he announced a 10 percent increase in pensions and the minimum wage to protect Russians from the effects of inflation.

But the Russian economy is hardly on solid footing. Capital controls and emergency reserves may not last long. And new US restrictions mean Russia could soon default on its foreign debt for the first time in more than a century.

Timothy Ash, senior emerging markets strategist at Bluebay Asset Management, said Putin now has to deploy those emergency reserves and that the rate cut was part of a public relations campaign.

“Information war”

“They are waging an information war with the West, part of which is the ruble,” he told CNN Business.

A deep recession is coming this year. The International Monetary Fund expects Russia’s GDP to shrink by 8.5% due to tough sanctions imposed on Moscow.

However, these sanctions have not yet dealt a deep blow to Russia’s fossil fuel reserves. It is becoming increasingly difficult for Moscow to sell its oil and coal, but its largest energy buyer, the European Union, is still unable to agree on an oil embargo, and an outright ban on Russian natural gas imports is not even considered.

Now Russia is adjusting its forecasts for a decline in oil production this year. Deputy Prime Minister Alexander Novak said oil production could fall to 480-500 million tons, about 6.5% less than in 2021, the state news agency RIA reported on Thursday. The Russian Ministry of Economy previously forecast a fall of about 9.3% this year.

“I think the cut will be much smaller,” Novak was quoted as saying during a visit to Iran. “There was only one month with a contraction of more than 1 million barrels per day, which is not that deep yet. So I think there will be a recovery in the future,” he added.

While many Western traders and refiners shun Russian oil and coal, India and China have stepped in to make up the shortfall.

— Reuters contributed to this article.

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