Why a strong rouble is a double-edged sword for Russia

Interest rates on rouble deposits have also soared above 20%, making the currency attractive to savers and as a speculative trade for its yield. At the same time, high borrowing costs have slowed imports, reducing demand for foreign currency.

The weakness of the US currency, whose index lost 6.6% since President Donald Trump’s “Liberation Day” tariff announcement on April 2, has also helped the rouble.

Although the central bank says there is a freely floating exchange rate, it has been selling the Chinese yuan, its only major intervention tool, to support the rouble. When the rouble strengthens against the yuan, its rate against the dollar strengthens as well to avoid arbitrage.

Why is a strong rouble a ‘double-edged’ sword?

The strength of the rouble means that dollar-denominated energy revenues generate fewer roubles for the Russian budget. A weaker rouble would boost budget revenues. The 2025 budget assumes an average rate of 94.3 roubles per dollar, but the current rate is around 78. If the rouble stays strong, analysts estimate the budget could lose 2.4% of its revenues this year.

Russian businesses also argue a strong rouble is making exports more expensive to buyers in dollars and other currencies. Exporters, from oil to metals to agriculture, are hurting. A stronger rouble makes their revenues shrink. Many officials and business leaders say they would prefer a rate of 100 to the dollar.

However,  Elvira Nabiullina, the governor of the central bank, argues that a softer currency would be a sign of economic vulnerability.

Nabiullina, who on Friday announces the latest interest rate decision, says the exchange rate is not just there to please exporters, stressing that the strong rouble is a product of the tight monetary policy needed to fight stubbornly high inflation.

What lies ahead?

Analysts have warned for months that the rouble is overvalued, but the currency has defied their forecasts so far. The central bank is widely expected to cut interest rates at its upcoming meeting. If it does, market rates will fall as well, prompting savers to pull money from rouble deposits. That could weaken the currency.

A bigger test looms in early September, when a 50-day deadline set by US President Donald Trump for Russia to show progress toward peace in Ukraine expires. If new US sanctions targeting buyers of Russian oil follow, the rouble could come under renewed pressure.

The last time the rouble weakened significantly was in November 2024, after Washington sanctioned Gazprombank, which had handled oil and gas payments.

A source close to the central bank pointed to Reuters that when the regulator cut the key rate from 17% to 11% between February and July 2015, the rouble took several months to weaken gradually. This is the regulator’s expectation this time.