By Alexander Marrow
MOSCOW (Reuters) - The Russian rouble surged to a more than two-month high against the dollar on Thursday, while geopolitical headwinds halted a tentative recovery on stock markets as President Vladimir Putin prepared to annex four Ukrainian territories.
Putin will on Friday begin formally annexing 15% of Ukrainian territory, presiding at a ceremony in the Kremlin to declare the regions part of Russia following referendums that Ukraine and the West have rejected as illegitimate.
By 1217 GMT, the rouble was 0.9% stronger against the dollar at 57.00, earlier hitting 56.5450, its strongest point since July 22.
The Russian currency had gained 0.4% to trade at 55.25 versus the euro, earlier touching 54.5750, its strongest since July 1. It had firmed 0.5% against the yuan to 7.985.
Finance Minister Anton Siluanov again mentioned that the government would prefer a weaker rouble, as he announced on Wednesday a new cut-off price for Russia's budget rule that diverts excess oil revenues into its wealth fund of $62-63 per barrel.
Siluanov also announced hefty borrowing plans for next year to help finance the budget deficit amid increased spending and floated the possibility of resuming FX interventions, this time with China's yuan.
"The words about possibly conducting foreign currency interventions as early as 2022 according to the 'old rules' resembles a 'cry for help' due to the rouble's unrestrained strengthening," said Dmitry Polevoy, head of investment at Locko Invest.
"The main question is whether the budget can afford it in light of the growing need for additional spending."
The rouble has been supported by capital controls and a collapse in imports since Putin sent troops into Ukraine in February. Geopolitical risks also remain elevated, with more U.S. and EU sanctions expected soon.
"For now, the rouble is supported by fears that new sanctions from the West could paralyse dollar trading in Russia," said Alor Broker in a note. "That's why many are getting out of the dollar."
STOCKS RECOVERY STUTTERS
BCS Global Markets said geopolitical risks should prohibit any major leg up for Russian stock indexes, which pared early gains.
The dollar-denominated RTS index was down 0.5% to 1,069.8 points. The rouble-based MOEX Russian index was 1.4% lower at 1,936.0 points, heading back towards February lows hit on Monday.
"In the coming days, the Russian market should trade in a narrow band - investors are likely to sit on the fence hoping for more clarity," BCS said.
Moscow Exchange, Russia's largest bourse, has gradually been restoring some order to financial markets, welcoming back some non-resident investors to certain instruments and extending trading hours for others.
The exchange plans to allow non-residents from "friendly" jurisdictions to return to the derivative market soon, it said on Thursday, but amid market volatility, the head of the bourse's supervisory board, Sergei Shvetsov, did not rule out more trading suspensions, without specifying which markets.
"We cannot rule out black swans in the future," Shvetsov told a financial forum. "If there is another situation, naturally there will be suspensions."