Russian rouble strongest since July on shrinking imports
The Russian rouble hit its strongest level against the U.S. dollar since July 24 on Wednesday with a top government official saying the strengthening was linked to shrinking imports due to high interest rates.
The central bank hiked its key interest rate to 21% to fight inflation and cut it to 17% this year as the economy is slowing and inflation is falling. However, the current rate level makes credit off-limits for most firms, including importers.
Russian imports fell by 7.3% in year-on-year terms in August, according to central bank data. Imports from China, Russia's main trading partner, fell by 10.6%, according to China's customs data.
"The strengthening of the rouble is primarily linked to a tighter monetary policy. Imports have decreased, and accordingly, with the same estimates for export revenues, the exchange rate has started to strengthen," said Finance Minister Anton Siluanov, speaking in parliament.
By 1150 GMT on Wednesday, the rouble traded at 78.85, after hitting 78.27 in over-the-counter trade, the strongest level since July 24. It strengthened by 0.7% to 11.01 against China's yuan, also the strongest level since the same date.
PROPOSED VAT INCREASE IN 2026
The central bank is expected to continue with cutting rates this year but the proposal from the government to raise value-added tax (VAT) in 2026, which will accelerate inflation, increased the likelihood of a pause.
Siluanov dismissed the idea that the central bank was deliberately supporting the rouble through its foreign currency sales.
"Everything operates based on the trade balance and capital flows. Therefore, the tightening of monetary policy has led to the strengthening of the exchange rate and corresponding consequences for both the economy and budget revenues," he said.
The rouble's rise contrasts with the general situation in the slowing economy, with the International Monetary Fund (IMF) predicting gross domestic product (GDP) growth slowing to 0.6% from 4.3% last year.
"The turn towards another round of strengthening was generally unexpected." said T-Bank's analyst Sofya Donets. An overwhelming majority of analysts are expecting the rouble to weaken to around 90 by the end of the year.