© Reuters. FILE PHOTO: A seller counts Russian ruble banknotes at a market in St. Petersburg, Russia, July 9, 2023. REUTERS/Anton Vaganov/File Photo
by Alexandre Maru
(Reuters) – The ruble weakened against the dollar on Friday after the Bank of Russia raised interest rates by more than expected by 100 basis points, in a sign of rising inflationary pressures, with risk-off sentiment hitting Russian assets ahead of the weekend.
The central bank’s decision to raise the key interest rate to 8.5% surprised analysts polled by Reuters, although inflation data this week led some to expect a larger increase than the 50 basis point increase expected on Monday.
The ruble was 0.4% weaker against the dollar at 90.62 by 1350 GMT, and lost 0.2% to trade at 100.73 against the euro. It fell 0.1 percent against the yuan, to 12.59.
Higher rates should make investments in Russian assets more attractive, but they can have a negative impact on economic growth by making lending more expensive.
Pressure mounted on the Russian currency after a failed armed rebellion by the Wagner mercenary group in late June. Attacks on Russian infrastructure have also dampened risk appetite.
The central bank blamed the ruble’s weakness on a drop in exports and a rebound in imports. Russia’s balance of payments was negative in June for the first time since 2020.
“This is bad news for the ruble,” said Natalya Orlova, chief economist at Alfa Bank. She added, “Another problem is that more and more export earnings are being paid in rubles,” which means that Russia receives a smaller amount of its foreign trade surplus in foreign currency.
Central Bank Governor Elvira Nabiullina said on Friday that the ruble’s price is closely linked to rising domestic demand, which is the main driver of inflation. She said strong demand leads to an increase in imports, while exports continue to decline.
Periodic capital outflows in response to political news have hit the ruble since Russia invaded Ukraine in February 2022. Nabiullina said the movement of capital has not affected the ruble recently.
An investor chat forum on Friday was full of comments about Moscow’s decision to keep compulsory military service for 18-year-olds, permanently increasing the number of young people at risk of conscription, after lawmakers dropped a proposal not to start before age 21.
“This topic is very sensitive for the market community because it directly affects this group (male traders of military age),” said a trader at a major Russian bank.
Rising oil prices, easing domestic demand for foreign currency, tax payment at the end of the next month by exporters should support the ruble.
The global index of Russia’s main exports rose 0.5 percent to $80.02 a barrel.
Russian stock indices were mixed.
The dollar-denominated RTS index fell 0.1% to 1,015.8 points. Russia’s ruble-based MOEX rose 0.1 percent to 2,920.6 points.
