Rouble strengthens in Moscow as Russia halts gas supplies to Bulgaria, Poland

The rouble strengthened on Wednesday after Russia said it had halted gas supplies to Bulgaria and Poland, firming to a more than two-year high against the euro in Moscow trade on the prospect of upcoming income tax payments.

Russian energy giant Gazprom (GAZP.MM) said it had halted gas supplies to Bulgaria and Poland for failing to pay for gas in roubles, the Kremlin’s toughest response yet to sanctions imposed by the West over the conflict in Ukraine.

By 0831 GMT, the rouble had gained 1.1 per cent to trade at 76.00 versus the euro, earlier hitting a more than two-year high of 75.9075.

It was 1 per cent stronger against the dollar at 72.82.

The suspension of gas supplies to a number of European countries could exacerbate geopolitical tensions and further worsen relations with Europe, having a negative impact on sentiment, said Veles Capital in a note.

However, Promsvyazbank analysts said corporate income taxes due on Thursday could deter the greenback from significant strengthening against the rouble.

The market is also looking ahead to Friday’s rate decision. The central bank is widely expected to cut its key interest rate by 200 basis points to 15 per cent as it tries to stimulate more lending in the economy in the face of high inflation, a Reuters poll showed.

Lower rates support the economy through cheaper lending but can also fan inflation and make the rouble more vulnerable to external shocks.

Trading activity remains subdued and somewhat erratic compared with levels seen before Feb. 24, when Moscow sent tens of thousands of troops into Ukraine. On the interbank market, the rouble was weaker: banks offered to buy dollars for 74.17 roubles and were selling them for 74.83.

Movements in the rouble are artificially limited by capital controls imposed by the central bank, and the economy faces soaring inflation, capital flight and the risk of a possible debt default after the West imposed tough sanctions.

Russian stock indexes were climbing.

The dollar-denominated RTS index (.IRTS) was up 2.7 per cent to 1,027.0 points. The rouble-based MOEX Russian index (.IMOEX) was 2.3 per cent higher at 2,371.3 points.