Two sides of the same ruble: The Russian currency’s recent strength isn’t likely to last — and it’s already hurting the country’s economy

The prolonged ruble rally is widely considered unstable, primarily due to budgetary constraints. The ruble traditionally weakens in the summer, when vacationers take advantage of cheaper travel packages and importers gear up for the New Year’s retail season by increasing purchases of foreign goods.

The Central Bank’s interest rate cut was modest, but it could still provide a positive signal to the economy. “Even a symbolic reduction of 100 basis points, bringing the rate down to 20%, is important because it marks a return to the trajectory of normal economic functioning,” commented Alexander Shokhin, head of the Russian Union of Industrialists and Entrepreneurs (RSPP) in the run-up to the Central Bank’s decision. In this scenario, economic revival could prompt companies to ramp up imports, increasing demand for foreign currency — and further rate cuts are possible.

As happens every year, July will see a regulated rise in the cost of utilities — and in the current environment, these hikes play a growing role in stoking inflation. Utility and electricity rates are set to increase by 12%. Gazprom, having lost the European market and still failing to fully compensate via Asian customers, lobbied for a nearly 12% increase in domestic gas prices. At the same time, the real interest rate — the gap between the Central Bank’s key rate and inflation — remains extraordinarily high. Even under tight monetary policy, this gap rarely exceeds 5-6%, while 2% is considered normal. In other words, the Central Bank has substantial room to lower rates.

“The carry trade is a factor completely unrelated to the real state of the Russian economy — it’s a reaction to high interest rates,” economist Aleksashenko told The Insider. “So if the Central Bank begins to truly believe that inflation is slowing, the flow of capital into rubles due to the interest rate differential will reverse and start to leave. It’s not a matter of if that will happen, but when.”

Sanctions, including those imposed on the Moscow Exchange, have made the currency market thin and volatile — yet another factor working against ruble stability. “There is virtually no foreign capital flowing into the Russian currency market compared to pre-war levels. Russia is effectively isolated from foreign investment. All inflows are domestic, and they’re limited,” commented Alexander Kolyandr, a senior fellow at the Center for European Policy Analysis (CEPA). “As a result, the market is what you’d call shallow, so even a small disruption now causes a much greater impact than it would have before 2022. With the ruble left to float freely, its exchange rate will swing up and down, and high volatility is inevitable for that very reason.”

Another key variable is how the ruble would behave if a ceasefire between Russia and Ukraine is reached. Expectations are for no agreement before autumn, following the summer military campaign. However, U.S. President Donald Trump’s leadership is not known for its predictability. While he may be suggesting at the moment that Russia and Ukraine can “fight for a while” longer, he could also just as quickly decide that enough is enough.

It is likely that the ruble would initially strengthen on the mere announcement of a ceasefire. But what comes next could be a sharp decline. “If the war ends, I would expect a swift monetary loosening and an immediate devaluation of about 20–35%. There will be a need to reallocate labor from the military sector. Inflationary pressures will likely remain elevated for another one to two years, even with a fast end to the war,” said Dmitry Nekrasov, director of the Center for Analysis and Strategies in Europe (CASE).

Much will depend on whether sanctions are lifted — and which ones. If imports and capital outflows resume quickly, the ruble could weaken further due to higher foreign currency demand. A situational shortage of hard currency is even possible in the immediate aftermath of a ceasefire. However, the ruble might then regain strength as the economy breathes easier, consumer confidence rebounds, and foreign investors return to the market.