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By Bloomberg

The ruble rose for a second day, set for its highest level this year, as Russia’s credit risk fell. Morgan Stanley said the rally is being driven by “flows, not fundamentals,” signaling a decline may be imminent.

The currency gained 1.2 percent versus the dollar on Friday, the steepest advance among its peers and extending a 3.8 percent jump in the first quarter. Five-year credit default swaps, contracts that insure Russian debt against non-payment, narrowed 13 basis points to 378, the lowest level in 2015.

Russian assets are recovering following a sell-off last year triggered by sanctions imposed on the nation amid the Ukraine crisis as Brent crude recovered some of its losses. The ruble is the world’s best-performing currency in 2015 with a gain of 6.4 percent versus the dollar. Crude prices, which are still down 50 percent from a June high last year, illustrate the ruble’s advance may not be justified, Morgan Stanley said in an e-mailed note.

“The ruble is heading to some equilibrium level,” Evgeny Batuev, head of trading at SKB Bank in Ekaterinburg, said in an e-mail. The currency “was sold-off in a panic, now people are coming up,” he said.

The ruble advanced 0.8 percent against the dollar to 57.139 by 12:02 p.m. in Moscow. The yield on five-year local government bonds fell six basis points to 12.07 percent, the lowest in a week on a closing basis.

Crude Falls

Crude oil, which comprises about 50 percent of Russia’s state budget revenue, sank 2.5 percent in London to $55.65 per barrel on Thursday after jumping 3.6 percent a day ago.

“We expect sanctions, 40 percent weaker oil and a tight fiscal policy response to lead to a 5.6 percent gross domestic product contraction in 2015,” Morgan Stanley analysts said in the e-mailed report dated April 2.

Russia’s $2 trillion economy staggered under international sanctions imposed on the country after the annexation of Crimea last year and was further battered by oil’s plunge into a bear market in November, which triggered a currency rout.

The Micex index of stocks rose for the fourth day on Friday, adding 0.4 percent to 1,668.08, the highest level in three weeks.

Shares of Moscow Exchange led the gain in equities, rising 6.3 percent and poised for the biggest advance since April 2014.

Bank of Russia, the largest holder in the stock with an 11.7 percent stake, said it won’t sell the shares as initially planned, citing the geopolitical situation and the need for “comprehensive control” over the nation’s market infrastructure. The country’s central bank was due to sell the stake by Jan. 1, 2016.

“The share overhang risk will now disappear,” Olga Naydenova, a banking analyst at BCS Financial Group in Moscow, said by e-mail. “It’s important that the central bank confirmed its partnership and interest in the exchange’s development.”