A woman walks past the headquarters of the central bank in Moscow. The rouble hit a new record low against the euro yesterday and trimmed gains against the dollar after an overnight rate hike by the central bank failed to bolster the currency for long as oil prices dropped sharply.

Central bank hikes key rate by 650 bps; does little to stop rouble rout; higher rates threaten to choke economy

 

Reuters

Moscow

 

 

The rouble plunged more than 11% against the dollar yesterday in its steepest intraday fall since the Russian financial crisis in 1998 as confidence in the central bank evaporated after an ineffectual rate hike.

The rouble opened around 10% stronger against the dollar after the central bank unexpectedly raised its benchmark interest rate by a hefty 650 basis points to try and halt the currency’s slide, but it reversed gains in volatile trade and repeatedly set new record lows.

It has now fallen close to 20% this week, taking its losses this year against the dollar to over 50% and raising memories of the crisis in 1998 when the currency collapsed within a matter of days, forcing Russia to default on its debt.

Although Russia’s public finances and reserves are much healthier than in 1998, analysts say the country is on the brink of a full-blown currency crisis.

At 1435 GMT, the rouble was down around 11% against the dollar at 72.44 after earlier racing past 80 roubles per dollar for the first time to be down around 20% at one stage from the previous close.

Against the euro, it was almost 13% weaker at 90.50.

The rouble has been hit by the slump in oil prices and Western sanctions imposed over Russia’s involvement in Ukraine, but its sharp decline over the past two days also reflects declining confidence in the central bank.

The 650-basis-point rate hike, less than a week after another 100-basis-point rise, was seen as a sign of desperation by the bank, whose Governor Elvira Nabiullina now appears powerless to stop the currency’s slide, raising the risk of capital controls.

The market ignored Nabiullina’s comments yesterday that the rouble was undervalued.

“If such an interest rate rise didn’t impress the market, then they (the central bank) have left the option of interventions of $10bn a day. They are in (the market) every day,” said Natalia Orlova, chief economist at Alfa Bank.

Investors were also unnerved by the prospect that Russian oil major Rosneft, which recently issued 625bn roubles ($8.67bn) in bonds, could convert the funds into foreign currency, adding further pressure on the rouble.

Rosneft has said the money will not be used to buy foreign currency.

Russia’s dollar-denominated RTS share index was down as much as 19% at one point, extending heavy losses from Monday, and shares in top bank Sberbank - seen as a barometer for the wider economy - plunged over 20%.

Russian sovereign dollar bonds fell and money market rates jumped.

President Vladimir Putin has blamed both the slide in oil and the rouble on speculators and the West. A weak rouble poses a major test for Putin, since his popularity in part depends on his reputation for guaranteeing prosperity and stability, and it stokes inflation.

“The central bank will have a very hard time stabilising the rouble as long as the sharp sell-off in oil prices continues,” Vladimir Miklashevsky, an economist at Danske Bank, said in a note.

Brent crude prices fell below $60 yesterday for the first time since July 2009, hurting the outlook for Russia’s oil-dependent economy, which the central bank says is likely to contract early next year.

The central bank has spent over $80bn defending the rouble this year, including more than $8bn since it floated the currency in November. The country still has ample reserves of around $416bn but analysts say the currency is in dangerous territory as it is increasingly being driven down by sheer panic.

“What now rules the Russian currency is not oil, or even waiting for it to move, but panic fuelled by a large number of rumours about the return of our country to the “98-year” regime,” said Alena Afanasyeva, a senior analyst at Forex Club in Moscow.