Russian rouble strengthens on US dollar ahead of the rate decision

Moscow, June 4, 2025 – The Russian rouble continued its upward trajectory against the US dollar on Tuesday, gaining investor momentum ahead of the Bank of Russia’s closely watched interest rate decision expected later this week. Amid heightened geopolitical tensions and persistent inflationary pressures, traders are positioning themselves cautiously in anticipation of a potentially hawkish stance by the central bank.

Currency Gains Amid Monetary Policy Expectations

By mid-afternoon Moscow time, the rouble firmed to around 87.2 against the US dollar, its strongest level in over two weeks. The gains come as investors speculate the Bank of Russia may hold or even raise rates to curb inflation, which remains stubbornly above the central bank’s 4% target.

“The market is pricing in a slightly hawkish tilt from the central bank, given the recent uptick in inflation expectations and the overall tightening in global financial conditions,” said Ivan Kopylov, a currency strategist at Renaissance Capital in Moscow.

According to official statistics, Russia’s annual inflation rate rose to 5.6% in May, up from 5.2% in April, driven by increases in food and utility prices. The central bank has kept its benchmark rate at 16% since February, after a sharp series of hikes throughout 2024 to rein in rising consumer prices.

Oil Prices and Exporter Flows Add Support

The rouble’s strength is also being underpinned by firm global oil prices, which support Russian export revenues and contribute to foreign currency inflows. Brent crude held steady above $78 per barrel, giving additional support to the rouble as Russian energy companies convert earnings into local currency to cover tax obligations.

"Exporter flows are another key driver this week," noted Natalia Orlova, chief economist at Alfa Bank. “With the monthly tax deadline approaching, we are seeing a pick-up in FX sales by exporters, which typically strengthens the rouble.”

External Factors Remain Volatile

Despite the current rally, the rouble remains under pressure from broader geopolitical and macroeconomic uncertainties. The ongoing war in Ukraine continues to draw Western sanctions, which have restricted Russia’s access to international capital markets and complicated cross-border trade.

Meanwhile, the US dollar has shown resilience globally, supported by expectations of a prolonged higher interest rate environment by the Federal Reserve. However, recent signs of slowing US economic growth have tempered some of that enthusiasm, helping emerging market currencies like the rouble regain some lost ground.

“The dollar has eased slightly against a basket of currencies, creating room for some EM currencies to rebound,” said Rachel Liu, a senior FX analyst at BNP Paribas. “But in the case of the rouble, local drivers such as oil, trade flows, and domestic monetary policy are taking center stage.”

Investor Outlook: Cautious Optimism Ahead

As the Russian central bank prepares to announce its rate decision on Friday, market participants remain divided. Some expect the bank to keep rates steady to support economic growth, while others argue a modest hike may be warranted to anchor inflation expectations.

“The central bank is walking a tightrope,” said Maxim Yegorov, head of fixed income at Moscow Investment Partners. “If it raises rates too aggressively, it could stifle fragile economic recovery. But if it stays passive, inflation risks becoming entrenched.”

In the bond markets, yields on short-term government debt have climbed in recent days, suggesting rising expectations of a rate hike. Meanwhile, the equity market remained subdued, with the MOEX Russia Index trading flat, as investors stayed on the sidelines ahead of monetary policy guidance.

The Russian rouble’s recent strength against the US dollar reflects a confluence of domestic and international factors, including exporter activity, oil prices, and central bank expectations. While short-term gains may continue if the Bank of Russia maintains a firm stance on inflation, long-term stability will depend on the broader geopolitical environment and structural reforms within the Russian economy.

For investors, the upcoming central bank decision will be pivotal in shaping currency and interest rate expectations for the second half of the year. With inflation still a concern and global uncertainties persisting, the rouble’s path forward remains cautiously optimistic—but far from guaranteed.