Ruble hits 2-year high against euro as Russia cuts rates and reverses debt

A customer hands Russian ruble banknotes and coins to a vendor at a market in Omsk, Russia October 29, 2021. REUTERS/File Photo

April 29 (Reuters) – The Russian ruble rose to a more than two-year high against the euro on Friday, helped by capital controls as Russia appeared to make a last-ditch effort to avoid a default and the central bank slashed interest rates by 300 basis points to 14%.

The Treasury made what appeared to be a late about-face to avoid a default as it made a number of already overdue international debt payments in dollars, despite previously promising they would be paid in rubles only. Continue reading

The Bank of Russia earlier cut interest rates by 300 basis points for the second time this month, surprising analysts who had forecast a smaller cut as it tries to cope with a shrinking economy and rising inflation. Continue reading

Movements in Russian markets are being hampered by the fact that the ruble is being bolstered by capital controls, while stocks are traded with a ban on short selling and foreign actors are prevented from dumping shares in Russian companies without permission.

Central bank deputy governor Alexei Zabotkin said Russia will gradually phase out capital controls as risks to financial stability subside.

By 1525 GMT, the ruble was up 1.2% against the euro to 74.47, having previously touched 73.50, its strongest since March 2020.

Against the dollar, it was up 1.9% at 70.74 after previously hitting a 6-month high of 70.3075. On the interbank market, the ruble hit a high of 67.7750.

Lower interest rates support the economy through cheaper lending, but they can also fuel inflation and make the ruble more vulnerable to external shocks.

Benchmark OFZ 10-year government bond yields fell to 10.10%.

The ruble has strengthened in recent days as export-oriented companies sold their foreign exchange earnings to pay off local debts that could top 3 trillion rubles ($43 billion) this month, according to analysts polled by Reuters.

Analysts at Sberbank CIB said exporters may scale back foreign exchange sales ahead of the long May holiday in Russia, a move that could halt the ruble’s recent bullish move.

The ruble has fully recovered to pre-February 24 levels, when Russia launched a so-called “military special operation” in Ukraine, which led to unprecedented Western sanctions, including a freeze on Russian reserves and efforts to limit access by Russian banks global financial system.

Russian stock indices were higher.

The dollar-denominated RTS index (.IRTS) rose 4.3% to 1,087.1 points. The ruble-based MOEX Russian Index (.IMOEX) rose 2.5% to 2,443.0 points.

Shares in VTB Bank (VTBR.MM) outperformed the broader market, rising 4.3% after daily Kommersant reported, citing sources, that the country’s second-largest lender could merge with state-controlled banks Otkritie and RNCB.

Promsvyazbank analysts said the move would likely improve VTB Group’s performance and the company’s share price, and allow banks to streamline their branch network.

($1 = 69.3488 rubles)

Reporting by Reuters editorial board by Louise Heavens and Mark Potter

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