Russian rouble in ‘catastrophic decline’

President Putin faces major economic crisis as massive interest hike fails to kick-start Russia’s currency.

Putin risks losing two of the main pillars on which his support is based - financial stability and prosperity [AP]

Russia has failed to halt the collapse of the rouble, leaving President Vladimir Putin facing a full-blown currency crisis that could weaken his grip on power.

The embattled currency extended a week of catastrophic losses by dropping 4 percent at the opening of trading in Moscow on Wednesday.

The world’s worst-performing currency along with the Ukrainian hryvnia, the rouble has lost more than 50 percent of its value this year.

It traded at 70.7 per dollar on Wednesday morning, or 4 percent lower than at the closing on Tuesday.

Rory Challands Reporting from Moscow:

“Everyone knows life is about to get much more expensive.”

I passed a children’s party on my walk to work. Kids were jumping around with Father Christmas (called Grandpa Frost here), in the remains of last week’s snow.
It reminded me that life rarely stops in economic crises. Russia is not experiencing hyperinflation like 1920s Germany.
At least, not yet. What people are doing is going shopping. If you’re a Russian and you’ve been thinking of buying a car, you’re doing it now. 
Right now. 
Price changes to reflect the rouble’s new value are imminent, and people want to get in there before that flat screen TV, that iPhone 6, that sofa, becomes instantly unaffordable. 
Everyone knows life is about to get much more expensive.

The rouble lost over 15 percent of its value this week despite Tuesday’s massive interest rate hike by the Russian central bank.

The 6.5 percentage point interest rate rise to 17 percent overnight failed to prevent the currency hitting record lows in a “perfect storm” of low oil prices, looming recession and Western sanctions over the Ukraine crisis.

“This is a very dangerous situation, we are just a few away from a full-blown run on the banks,” Russia’s leading business daily Vedomosti said in an editorial on Wednesday.

“If one does not calm down the currency market right now, the banking system will need robust emergency care.”

Putin has blamed the rouble’s crash on speculators and the West, while a presidential spokesman attributed the market turbulence to “emotions and a speculative mood”.

The rouble lost 11 percent against the dollar on Tuesday, its steepest one-day fall since the Russian financial crisis in 1998.

It has fallen 20 percent since the start of the week and more than 50 percent this year.

As Moscow faced up to the brewing crisis, US Secretary of State John Kerry said sanctions could be lifted swiftly if Putin takes more steps to ease tensions and lives up to commitments under ceasefire accords to end the Ukraine conflict.

“These sanctions could be lifted in a matter of weeks or days, depending on the choices that President Putin takes,” Kerry told reporters in London.

This comes as US President Barack Obama was expected to sign legislation this week authorising new sanctions on Russia over its activities in Ukraine.

Stability and prosperity

The bill would also allow the US to provide weapons to the Kiev government, White House spokesman Josh Earnest said.

For the Russian economy, the currency crisis means a deeper recession is more likely next year as high interest rates will crimp growth.

For businesses, it means more uncertainty and less access to funding. For the central bank, it means a credibility crisis.

Can Moscow stop the rouble’s free-fall?

Russian officials, however, sought to project a message of confidence on state television, dwelling on the advantages of rouble devaluation, such as a boost to domestic manufacturing.

For Putin, it increases the risk of losing two of the main pillars on which his support is based – financial stability and prosperity – and brings an unwelcome policy headache at a time when relations with the West are also in crisis over Ukraine.

“Putin rode the wave of higher oil prices in the years after he came to power, but there is no question that the economics will start to adversely impact the politics,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.

“The pieces are falling into place to start to affect the political sustainability of this regime,” he told Reuters news agency.

Putin has enjoyed popularity ratings above 80 percent since Russia reclaimed the Crimea peninsula from Ukraine in March.

He has no obvious rivals, with critics accusing him of smothering dissent, and much of the state’s big business is in his allies’ hands.

Source: Al Jazeera, News Agencies