Trump hands Russian economy a lifeline after 3 years of war

After three years of war, Washington may have offered Moscow an economic lifeline just as the Russian economy is over-heating driven by western sanctions. US President Donald Trump is urging for a swift agreement to end the war in Ukraine, which has alarmed Washington’s European allies. This comes amid skyrocketing interest rates, persistently high inflation, and Russia’s massive fiscal stimulus.

Rusal stock trading surges 15-fold

Buoyed by prospects for sanctions relief, one of the few Russian companies left on any of the world's major exchanges saw a more than 15-fold surge in trading activity last week. The Rouble surged to a near six-month high against the dollar. The Rouble has rallied 24 per cent against the dollar and 15 per cent versus the Chinese yuan this year.

Add WION as a Preferred Source

That is primarily due to optimism about potential improvements in relations with the US. The Russian central bank linked the Rouble 's surge since the beginning of the year to the easing of geopolitical concerns after Trump's intervention. However, the central bank said it was too soon to assess the effects on the economy.

The Russian central bank said, "The strengthening of the Rouble was linked both to the markets' reaction to geopolitical events and to the seasonal decrease in demand for foreign currency from importers." The bank, however, added, "It is currently difficult to assess how sustainable the strengthening of the Rouble observed in recent weeks will be and how it will affect prices."

Inflation has become the biggest problem for the Russian government, and a stronger Rouble would help solve that. The central bank, in the latest meeting, decided to keep the benchmark interest rate unchanged at 21 per cent, the highest level since the early 2000s. This was to combat inflation.

The minutes of the latest meeting showed the bank had contemplated raising the rate even higher to 22 per cent. The central bank projects the inflation rate to reach 10.6 per cent in the current quarter. Russia's GDP is expected to increase at a slower 2.9 per cent rate compared to 3.3 per cent in the December quarter last year.

While government spending is usually good for the economy, Russia’s fiscal expansion is for defence and is now weighing on corporate investment. Moscow's defence spending cuts are unlikely anytime soon. However, other economic constraints should relax, sanctions might be lifted, and western firms could return if a deal is struck.

(With inputs from the agencies)