Russia cut interest rates on Thursday as a resurgent ruble – backed by robust oil and gas revenues and government support – takes some pressure from the swaying economy.
At an extraordinary meeting, the Russian central bank cut interest rates to 11% from 14% and said that further reductions could follow. Interest rates were raised as high as 20% in the immediate aftermath of Russia’s invasion of Ukraine in February, when the bank tried to prevent Western sanctions that triggered a financial crisis.
“Inflationary pressures are easing against the backdrop of the dynamics of the ruble’s exchange rate, as well as the marked decline in inflation expectations of households and businesses,” the Russian central bank said in a statement. It said it expected inflation to fall to between 5% and 7% this year, down from around 17.5% this month.
The ruble crashed to a record low of around 135 US dollars in the wake of the invasion as the West froze around half of Russia’s $ 600 billion in foreign exchange reserves. Hundreds of multinational corporations have left the country, and Russia has been banned buy important western technology and services.
But Russia’s currency has since picked up again and is the world’s top performer this year, according to Reuters, backed by capital controls aimed at forcing companies and investors to buy rubles, and rising global energy prices. A US dollar now buys around 62 rubles.
The West’s efforts to curb Russian energy imports have been slow, and rising oil and gas prices have strengthened the Kremlin’s coffers.
“The key point is that high oil and gas revenues give decision-makers a lifeline so they can calm down economic emergencies,” said William Jackson, chief economist for emerging markets at Capital Economics, in a research note.
“Against that backdrop, a further easing of capital controls and further interest rate cuts seem likely,” he added.
Russian President Vladimir Putin spent years until the war trying to build a “fortress economy”, accumulating reserves that could be deployed in the event of an emergency. On Wednesday, he announced a 10% increase in pensions and minimum wages to protect Russians from the effects of inflation.
But Russia’s economy is hardly on solid ground. Capital control and emergency reserves can only last so long. And new US restrictions mean that Russia may 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 deploy these emergency buffers, and that the interest rate cut was part of a public relations campaign.
“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 Russian GDP to fall by 8.5%, as a consequence of the harsh sanctions imposed on Moscow.
Nevertheless, these sanctions have not yet penetrated deep into Russia’s fossil fuel resources. Moscow finds it more difficult to sell its oil and coal, but the largest energy customer – the EU – still can not agree on an oil embargo and a direct ban on Russian natural gas imports is not even on the table.
Russia is now trimming the forecasts for the decline in oil production this year. Deputy Prime Minister Alexander Novak said oil production could fall to between 480 million and 500 million tonnes, a decrease of about 6.5 percent from 2021, the state news agency RIA reported on Thursday. Russia’s Ministry of Economy had previously predicted a fall of around 9.3% this year.
“I think the contraction will be much smaller,” Novak was quoted as saying by reporters on a visit to Iran. “It was only one month with a contraction of more than 1 million barrels per day, which is not so deep now. So I think there will be an improvement in the future, “he added.
While many Western traders and refineries have avoided Russian oil and coal, India and China have moved in to absorb some of the slack.
– Reuters contributed to this article.