Russia Cuts Key Interest Rate. Protecting the Ruble Is Painful.

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The Russian central bank cut its benchmark interest rate from 20% to 17% on Friday after more than doubling it just days into the Ukraine invasion.

The previous rate hike, along with strict capital controls, financial sanctions that prevented Russian banks from selling, and oil and gas payments, have helped the currency recover to its pre-invasion level in a market with very little liquidity.

“Financial stability risks are still present, but have ceased to increase for the time being, including owing to the adopted capital control measures,” the central bank said in a statement. The bank said annual inflation will continue to rise but that the latest weekly data “pointed to a noticeable slowdown in the current price growth rates.”

It may be a symbolic victory for Russia, but it comes at a great cost. Lowering the key interest rate from 20% to 17%, coming into effect from Monday, may be an acknowledgement that jacking up borrowing costs is no long-term solution for propping up the currency.

The Russian economy is heading for the worst recession since the collapse of the Soviet Union, the U.K. government predicted.

Sooner or later the central bank is going to have to cut rates further — in fact, the bank itself said it “holds open the prospect of further key rate reduction” at upcoming meetings. And some 60% of Russia’s foreign currency reserves are frozen, limiting the capacity for authorities to intervene directly in markets.

Russia’s fighting back the best it can against having its dollars neutralized, and has been more successful than might have been expected so far. The next line of defense for the country is trying to selling gold to those nations that might still buy it in order to get around the freeze and keep energy exports flowing, Didier Darcet of Gavekal-IS wrote in a note. “Gold is becoming the referee between impermeable markets,” he said.

The currency was trading at 78 rubles to $1 Friday, around the level it was before the invasion began on Feb.24.

The U.K. on Friday tried to ratchet up pressure on the regime by extending sanctions to President Vladimir Putin’s two adult daughters, matching moves by the U.S. earlier in the week.

These sanctions are likely a long game. It will take months for them to reap their full effect, and Russia’s central bank is rapidly running out of firepower to do anything about it.