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


Flying under the radar for investors who are grappling with inflation and global stock corrections right now is one of the world’s best performing currencies.

It just happens to be housed one of the world’s most vilified nations, and few investors may be willing to go near it, for obvious reasons.

The Russian ruble

has been on a relentless march higher since the lows seen after the country invaded Ukraine three months ago, and as Western nations piled on sanctions. But after breaking below 60 rubles per U.S. dollar earlier this week, a level not seen since 2018, some biggish air finally started to come out of the currency on Thursday.

In its third cut since April, the Bank of Russia lowered its key interest rate to 11% from 14%, and the Russian currency was last trading down more than 6% at 64.37 per dollar. Still, that key rate remains some ways off from where it was sitting in late February, at 9.5%, before the bank was forced to jack it up to 20% to keep a lid on surging inflation. The ruble traded at a low near 158 rubles per dollar on March 7, according to FactSet.

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

Recognizing its currency was a bit too strong, the government earlier this week lowered the percentage of foreign-currency that exporters were required to convert into rubles to 50% from 80%.

A strong national currency, traditionally lines up with a strong economy, though that’s not a hard and fast rule. According to most forecasters, Russia is facing bleak economic prospects amid rising costs from the biggest land war in Europe since WWII, and as countless western businesses have turned their backs on the warring nation.

A strong ruble has helped stabilize soaring prices in the country, noted William Jackson, chief emerging markets economist at Capital Economics. “At the same time, the Central Bank of Russia also noted that financial stability risks have eased and suggested that policy makers’ emphasis is shifting to the economy, which is clearly struggling,” he said.

“Even so, the key point is that high oil and gas revenues are providing policy makers with a lifeline, allowing them to row back emergency economic measures. Against that backdrop, a further easing of capital controls and additional rate cuts seem likely,” said Jackson.

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

“Ordinarily, given war, there’d be big capital flight out of Russia, like in 2009 & 2014 (blue). That’s not possible now, so Ruble reflects only “half” the story: a super strong current account. Ruble strength is fiction…”

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