Why Russia, which raised interest rates to 20%, cut them three times in a month... 'Ruble' Soars Rapidly

Since the Ukraine War Outbreak, Reduced from 20% to 11%
Effect of Decreased Oil and Gas Import Payments Due to Ruble Surge
"Fiscal Decline, Difficulty Securing War Expenses... Further Reduction Expected"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] The Russian Central Bank has drawn attention to the background after cutting its benchmark interest rate three times in a short period since early last month. This is because it implemented consecutive rate cuts instead of rate hikes amid a situation of extreme double-digit inflation occurring every month. Experts warned that this is a sign of various side effects emerging as the sharply rising value of the ruble, caused by capital controls after the Ukraine war, is putting pressure on the Russian economy.

According to CNN on the 26th (local time), the Russian Central Bank stated in a press release, "From the 27th, the benchmark interest rate will be adjusted from the existing annual 14% to 11%, a 3 percentage point cut," adding, "The risks to financial stability have somewhat eased, so capital movement controls have been partially relaxed." It also emphasized, "Additional rate cuts are under consideration depending on the external environment."

Thus, the Russian benchmark interest rate, which had risen to 20% after the outbreak of the war, has been cut three consecutive times following two cuts last month. The Russian benchmark rate was sharply raised from 9.5% to 20% on February 28, four days after the invasion of Ukraine began. Subsequently, it was cut by 3 percentage points twice last month: from 20% to 17% on the 8th, and from 17% to 14% on the 29th.

Some voices express concern that this rate cut may worsen Russia's inflation situation. Russia's inflation rate recorded 17.5% on the 20th, slightly down from 17.8% recorded last month, but it still remains more than four times higher than the Russian Central Bank's target of 4%.

The Russian Central Bank stated, "The annual inflation rate will fall to 5-7% in 2023 and drop to around 4% in 2024," but also noted, "The external environment for the Russian economy remains difficult, significantly limiting economic activity."

Despite the risk of further price increases, the reason the Russian Central Bank has again cut interest rates is interpreted as due to the rapid rise in the ruble exchange rate. The ruble's value has recently risen to an all-time high, even surpassing pre-war levels, which is analyzed to be putting pressure on the economy in reverse.

According to Bloomberg News, the ruble's value plummeted from 84.37 rubles per dollar on February 24, the day the Ukraine invasion began, to 143 rubles on March 7, but surged to 64.67 rubles as of the 26th. After the Russian government declared that natural gas export payments to Europe must be made in rubles and enforced controls requiring export companies to convert more than 80% of their foreign currency earnings into rubles, the ruble's value rose sharply. The Russian government has artificially increased the ruble's value due to concerns about rapid inflation caused by rising import prices when the ruble falls.

However, the ruble's value rising more than before the war is now being evaluated as a burden on the economy. The Wall Street Journal (WSJ) pointed out, "The sharp rise in the ruble's value reduces foreign currency-denominated payments for oil and natural gas imports, which account for more than 45% of Russia's fiscal revenue."

Ultimately, despite the intensifying inflationary pressure, Russia is expected to have no choice but to pursue further rate cuts. William Jackson, Chief Emerging Markets Researcher at Capital Economics, analyzed, "The Russian government cannot reduce oil and gas imports, which are the only support sustaining the current economy," adding, "To prevent further sharp rises in the ruble, it will have to cut interest rates further and relax capital controls."

This content was produced with the assistance of AI translation services.