Russia cuts interest rates as the ruble recovers offer some relief

At an emergency meeting, Russia’s central bank cut interest rates to 11% from 14% and said further cuts were possible. Interest rates rose as much as 20 percent immediately after Russia’s invasion of Ukraine in February as the bank sought to avert Western sanctions that could trigger a financial crisis.

“Inflationary pressures are easing due to the dynamics of the ruble exchange rate as well as the sharp decline in inflation expectations of households and businesses,” the Russian central bank said in a statement. He said he expects inflation to fall between 5% and 7% this year, from about 17.5% this month.

The ruble collapsed to a record low of about $ 135 in the aftermath of the invasion as the West froze about half of Russia’s $ 600 billion foreign exchange reserves. Hundreds of multinationals have fled the country and Russia has been banned market for basic western technology and services.
However, Russia’s currency has recovered since then and has the best performance in the world this year, according to Reuters, backed by capital controls aimed at forcing businesses and investors to buy rubles and global energy prices soaring. One US dollar now buys about 62 rubles.

Efforts by the West to curb Russian energy imports have been slow, and rising oil and gas prices have boosted Kremlin funds.

“The bottom line is that high oil and gas revenues provide policymakers with a lifeline, allowing them to undo emergency financial measures,” said William Jackson, chief emerging market economist at Capital Economics. .

“In this context, a further easing of capital controls and additional interest rate cuts seems possible,” he added.

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

But Russia’s economy is not on a solid footing. Capital controls and contingency reserves can only last that 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, a senior emerging market strategist at Bluebay Asset Management, said Putin now had to develop these emergency buffers and that interest rate cuts were part of a public relations campaign.

“Information War”

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

A deep recession is coming this year. The International Monetary Fund expects Russia’s GDP to shrink by 8.5% as a result of the harsh sanctions imposed on Moscow.

However, these sanctions have not yet deeply struck a chord with Russia’s fossil fuel resources. Moscow is finding it increasingly difficult to sell its oil and coal, but its biggest energy customer – the European Union – is still unable to agree to an oil embargo, and a complete ban on Russian gas imports is not even on the table.

Russia is now narrowing its forecast for cuts in oil production this year. Deputy Prime Minister Alexander Novak said oil production could be cut between 480 and 500 million tonnes, down about 6.5% from 2021, the state-run RIA news agency reported on Thursday. Russia’s Economy Ministry had previously forecast a drop of about 9.3% this year.

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

While many Western traders and refineries are shunning Russian oil and coal, India and China have moved to take part in the easing.

– Reuters contributed to this article.

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