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Russia: Back from the brink

Interest rate cuts, rallying oil prices and an easing of tensions with neighboring Ukraine: Russia couldn't ask for a better combination perhaps to bring it back from the brink of economic crisis.

Last week the country's central bank slashed interest rates by a 150 basis points to 12.5 percent amid a recovery in the Russian ruble and signs that inflation in the country had peaked.

Maxim Shipenkov | AFP | Getty Images

"The ruble has been on a tear from very depressed levels and this has a lot to do with oil, which is a huge performer," Joseph Dayan, head of markets at BCS Financial, told CNBC on Tuesday.

"Close to 60 percent of Russia's budget is dependent on oil or oil-related income, so not surprisingly, both of these moves are going together. There are other things that are coming together for the Russian story – geopolitical factors in particular," Dayan added.

Read MoreRussia's economy shrinks 2-4% despite Putin's positive spin

Oil prices were trading at 2015 peaks on Wednesday, while the Russian rouble has soared almost 14 percent against the U.S. dollar so far this year to about 50, making it one of the best-performing global currencies.

Dayan said Russia was also benefiting from the fact that fighting in Ukraine has ebbed in the past few months. Moscow has been under Western sanctions since annexing Ukraine's Crimea region in March 2014.

It's those sanctions, together with a rout in oil prices in the second half of last year that helped spark a currency crisis, as the ruble fell sharply to a record low against the dollar at the end of last year.

Deep pain

Russian Prime Minister Dmitry Medvedev said last month the Russian economy shrank by 2 percent in the first three months of this year, the first contraction since 2009. The International Monetary Fund sees the economy shrinking by a steep 3.8 percent across 2015 as a whole and 1.1 percent in 2016.

Still, analysts said economic conditions in Russia had not deteriorated as much as feared just a few months ago and signs of stabilisation boded well.

The head of Societe Generale told CNBC on Wednesday that it was seeing signs of normalization in its Russian operations, despite suffering a 91 million euro ($102 million) loss in the first quarter on its Russian business as loan demand dropped.

Read MoreSocGen CEO: Russia is now normalizing

"In Russia, as expected, the quarter has been more difficult because households have stopped borrowing to buy cars," said Frederic Oudea, the CEO of the French bank. "But I must say that we have seen, progressively, signs of normalization with interest rates going down, with the ruble improving versus the dollar."

Ruble watch

For some analysts, though, ruble strength could now pose a big threat to fledgling economic stabilization.

The ruble, which is up 37 percent from an intraday record low hit against the dollar in December, threatens to inflate Russia's budget deficit by reducing oil revenues in local currency terms.

"Having absorbed the shock of massive devaluation at the back-end of last year, you take pain up front – you get the inflation shock, you get the interest rate shock, then you stabilise and you try to enjoy the gains over a long period," said Christopher Granville, managing director of Trusted Sources, an emerging markets research firm.

"The trouble is that you can get the worst of both worlds and this is the risk that Russia faces – it took the pain of devaluation and now it may miss out on the gains if the bounce back is too rapid," he said. (Tweet This)

"Even beyond that, massive swings in the exchange rate are bad for business."

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