The Russian rouble rose against the euro to the highest in more than two years on Friday and headed towards 70 to the dollar in Moscow trade before paring some gains, supported by capital controls as the central bank cut interest rates again.

The Bank of Russia cut its key interest rate by 300 basis points for the second time this month, to 14%, as it tries to stimulate more lending in the economy in the face of high inflation, surprising analysts who had forecast a smaller reduction.

Movements on Russian markets are affected by the rouble being propped up by capital controls, while stocks are trading with a ban on short selling and with foreign players barred from ditching shares in Russian companies without permission.

At 1052 GMT, the rouble was up 1.6% to trade at 74.20 against the euro, after earlier touching 74.0525, its strongest level since March 2020.

It was 1.4% firmer against the dollar at 71.09 , after earlier hitting a six-month high of 70.3075.

The rouble largely ignored the rate decision, but the market will be watching closely when Governor Elvira Nabiullina gives a media briefing at 1200 GMT.

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

Yields on 10-year benchmark OFZ treasury bonds stayed at 10.14% after the rate decision.

TAX PAYMENT SUPPORT

The rouble has firmed in the past few days as export-focused companies were selling their foreign exchange revenues to meet local liabilities that could exceed 3 trillion roubles ($43 billion) this month, according to analysts surveyed by Reuters.

Sberbank CIB analysts said exporters could cut back on their FX sales significantly ahead of Russia's long May holidays.

"The rouble could slip to 74-75 versus the dollar today," Sberbank CIB said.

The rouble has fully recovered to levels seen before Feb. 24, when Russia started what it calls "a special military operation" in Ukraine that led to unprecedented Western sanctions, including a freeze on Russia's reserves and efforts to limit Russian banks' access to the global financial system.

Russian stock indexes were higher.

The dollar-denominated RTS index was up 3.2% at 1,075.3 points. The rouble-based MOEX Russian index was 1.8% higher at 2,426.6 points.

Shares in VTB Bank outperformed the wider market, climbing 4.3% after the Kommersant daily reported, citing sources, that the country's second-largest lender may merge with state-controlled banks Otkritie and RNCB.

Promsvyazbank analysts said the move would likely improve VTB Group's performance and the company's share price, as well as allow the banks to optimise their branch network.

($1 = 69.3488 roubles)

(Reporting by Reuters Editing by Louise Heavens and Mark Potter)