Rouble pulls up from record low with war in Ukraine, sanctions in focus

The Russian rouble firmed on Friday, pulling up from all-time lows hit in the previous session when President Vladimir Putin ordered Russian forces to invade Ukraine. No Russian assets were left unscathed in heavy shelling on Thursday after Russian forces fired missiles at several Ukrainian cities and landed troops on its south coast. The fighting continued on Friday.
 

At 0603 GMT, the rouble was 0.7% stronger against the dollar at 84.72, after hitting a record low of 89.60 in highly volatile trading the day before. Against the euro, the rouble gained 0.5% to trade at 94.78 , having hit an all-time low of 101.03 on the interbank market on Thursday.
 

The weakening in the rouble after the Ukraine invasion is expected to dent living standards in Russia and fan already high inflation that is close to 9%, prompting action from the central bank. The central bank may now address the market crisis with an unplanned interest rate hike as it did in late 2014 when it raised its key rate to 17% from 10.5% late at night amid a plummeting rouble.
 

"We think a prompt out-of-schedule 400bp or bigger hike by the CBR is likely with the key rate exceeding 13%," Morgan Stanley said in a note. The central bank, which targets inflation at 4%, has already announced foreign currency sales to support the rouble, embarking on interventions to shore up financial stability for the first time since 2014 when Russia annexed Crimea from Ukraine.
 

The market is also digesting new harsh Western sanctions against Russia. Even though the moves stopped short of disconnecting Russia from the SWIFT international banking system or targeting its oil and gas exports, and Russia has spent the past seven years building up formidable financial defences, analysts said its economy is unlikely to withstand the onslaught of coordinated penalties from the West in the long run.