Russia raises key rate after rouble slumps

The Russian central bank has announced a steep increase of its key interest rate from 10.5 to 17 percent after the rouble plunged to a fresh record low.

“This decision is aimed at limiting substantially increased ruble  depreciation risks and inflation risks,” the central bank said in a statement posted on its website early on Tuesday.

The rouble on Monday suffered a mini-crash, falling by 9.5 percent in a single day despite repeated interventions by the central bank, with the latest apparently taking effect on Monday afternoon.

The slide came as the bank warned the low oil price could trigger a contraction of nearly five percent next year and as tensions surged with the US over the Ukraine crisis.

A dramatically higher interest rate – which was set at 5.5 percent at the beginning of the year – now threatens to further strangle the economy.

The ruble broke through the level of 64 to the dollar and 78 to the euro for the first time even though the Bank of Russia has already spent about $6 bln (4.8 bln euros) so far this month to slow the currency’s slide.

Russian news agencies said the ruble briefly jumped from 61 back to 60 on the dollar at around 1300 GMT, possibly due to the latest central bank intervention, but it did not stop a further slump.

Having lost over 49 percent of its value against the dollar this year, the ruble’s slide is now worse than the 48 percent of the hryvnia in Ukraine, which is fighting a war and is on the brink of bankruptcy.

Russia’s support of rebels in eastern Ukraine and its annexation of Crimea brought on Western sanctions that gave the ruble its first knock earlier this year.

The fear factor

Geopolitical tensions have stepped up in recent days following votes by US lawmakers approving more sanctions against Russia and the delivery of up to $350m worth of US military hardware to Kiev.

However the heart of the problem is plunging oil prices.

Half of Russia’s revenues come from oil and gas, and the drop in the price of crude oil by half in the past six months has dealt a body blow to the country’s finances and Russians’ confidence in the ruble.

The rouble’s fall is “driven by sentiment and fear”, Chris Weafer, who runs Macro Advisory consultancy, told the AFP news agency.

“The oruble is now in free fall based on this fear factor,” he said. “The normal rules of economics don’t apply.”

Weafer said “the government has to find a way to stop this decline and restore confidence”.

Economist Maxim Buyev wrote in the Vedomosti daily that “the government must offer a clear plan of reforms” to restore confidence in the currency.

Elvira Nabiullina, the central bank head, said last week that the bank is prepared to spend up to $85 billion over the next year to prop up the ruble if necessary.