After Russia’s third rate cut in two months, some air is finally coming out of the ruble

The Russian ruble USDRUB,
+6.75%
since the lows following the country’s invasion of Ukraine three months ago and the imposition of sanctions by western nations, it has been on an unrelenting march higher. But after falling below 60 rubles per US dollar earlier this week, a level not seen since 2018, some bigger air finally came out of the currency on Thursday.

The Bank of Russia cut interest rates to 11% from 14% in its third cut since April, and the Russian currency was last down more than 6% at 64.37 per dollar. Still, that benchmark rate is still a far cry from where it was at 9.5% at the end of February, before the bank was forced to raise it to 20% to rein in rising inflation. The ruble was trading at a low of nearly 158 rubles per dollar on March 7, according to FactSet.

Strict capital controls imposed shortly after the invasion to discourage Russian exporters from abandoning the currency are part of the story of the ruble’s strength. The other half is strong oil and gas earnings, with some EU countries setting up ruble accounts to buy Russia’s gas as the bloc fights a cohesive ban on the country’s energy.

Recognition of its currency has been a little too strong, the government said earlier this week reduced the foreign currency share that exporters had to convert from 80% to 50% in rubles.

A strong national currency traditionally goes hand in hand with a strong economy, although this is not a hard and fast rule. According to most forecasters, Russia faces bleak economic prospects as costs mount from Europe’s biggest land war since World War II, and countless Western companies have turned their backs on the warring nation.

A strong ruble has helped stabilize rising prices in the country, noted William Jackson, chief emerging market economist at Capital Economics. “At the same time, the Central Bank of Russia also noted that risks to financial stability have diminished and indicated that policymakers’ focus is shifting to the economy, which is clearly struggling,” he said.

“Nevertheless, the key point is that high oil and gas revenues provide policymakers with a lifeline, enabling them to roll back emergency economic measures. Against this backdrop, further easing of capital controls and additional rate cuts seem likely,” Jackson said.

This tweet from Robin Brooks, chief economist at the Institute of International Finance, explains what lies beneath the ruble using the chart below that investors are looking at a mirage of recent strength.

“Normally, in the face of war, there would be a major flight of capital out of Russia, like in 2009 and 2014 (blue). This is not possible now, so the ruble reflects only “half” the story: a super strong current account. Ruble strength is fiction…”