Russia cuts rates to 20% as ruble races to lead currency growth in 2025

Russia’s central bank cut interest rates by 100 basis points on Friday, bringing the key rate down to 20% for the first time since September 2022.

The cut comes as inflation, which President Vladimir Putin had previously called “alarming,” finally shows signs of cooling. The decision was made after inflation dropped to 6.2% in April, down from an average of 8.2% in the first quarter of 2025.

Rates had been stuck at 21% since October, the highest level since the central bank created the current benchmark in 2013.

The Bank of Russia said on Friday that demand is still running hotter than what local industries can supply, but claimed the economy is “gradually returning to a balanced growth path.” However, they made it clear they plan to keep monetary policy tight “for a long period” to bring inflation back to their 4% target.

Economic slowdown and war tensions push rate decision

The cut didn’t come out of nowhere. Maxim Reshetnikov, Russia’s economy minister, had been calling for a rate reduction earlier in the week. His concern centered around shrinking growth across multiple sectors. 

Russia’s GDP growth had jumped after the early damage from the war in 2022 and 2023, but the bounce didn’t last. By Q1 2025, growth dropped to 1.4%, compared to 4.5% in the last quarter of 2024. Most of what’s left is in military and defense manufacturing, held up by heavy state spending.

The full-scale invasion of Ukraine in February 2022 continues to distort economic fundamentals. The ruble took a hit back then, raising the price of everything imported. Russia had to rebuild its financial system from the ground up while navigating sanctions, a military budget explosion, and volatile export revenue. But even with all of that, the ruble hasn’t just stabilized—it’s thriving.

Bank of America called the ruble the best-performing currency in the world so far this year. Capital controls, strict rate policies, and a weakening US dollar are all feeding that outcome. Even on Friday, after the rate cut, the greenback jumped 2.72% against the ruble, showing how closely traders watch moves from the Kremlin.

Nicholas Farr, an economist at Capital Economics, said the 20% cut surprised markets. “It was a dovish surprise,” he said, predicting that rates would now likely hit 17% by year-end, rather than the previously expected 18%. But he cautioned, “demand-supply imbalances from the war suggest interest rates will need to stay in restrictive territory.”

Ruble strength relies on exporters and strict controls

Another major factor pushing up the ruble is how Russian exporters handle their profits. The government forces companies—especially oil firms—to bring back a chunk of their earnings and exchange them into rubles. That demand fuels the ruble’s rise.

Between January and April, those large exporters sold $42.5 billion in foreign currency, a 6% jump from the previous four months, based on CBR data.

There’s also been a change in how much cash the CBR is putting into the system. Steve Hanke, economics professor at Johns Hopkins University, pointed out that in August 2023, the money supply was growing at 23.9% per year. Since January, it’s dropped sharply. As of now, the growth rate is actually negative, contracting at -1.19% annually.

Expectations earlier this year that President Donald Trump, back in office, would help bring peace between Moscow and Kyiv had initially pushed some foreign investment back into ruble assets. Wells Fargo’s McKenna said that buzz gave the currency another boost, even as capital controls remained in place. But the optimism didn’t last. Talks have gone nowhere. Attacks continue, and nothing has changed at the negotiating table.

Still, the ruble has stayed strong. But analysts say that’s not going to last. Melaschenko warned that the currency is “close to its maximum and may begin to weaken in the near future.” With oil prices dropping hard this year, revenue from energy exports will likely fall too. That would cut into how much foreign currency enters the country, dragging on ruble strength.

McKenna also pointed out that a solid peace agreement between Russia and Ukraine might actually wreck the rally. “Ruble can selloff pretty rapidly going forward, especially if a peace or ceasefire is reached,” he said.

In his view, the end of the war would mean dropping the capital controls that are holding the ruble up. “In that scenario, capital controls probably get fully lifted and the central bank might cut rates rather quickly,” he added.

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