October 31, 2014 12:32 pm Russia acts to steady rouble by raising rates to 9.5% Courtney Weaver in Moscow Russia’s central bank has raised its key interest rate by 150 basis points to 9.5 per cent in an attempt to stem the steady weakening of the rouble in the face of international sanctions and the crisis in Ukraine. The rouble has plunged 23 per cent against the dollar since the start of the year, losing 9 per cent against the US currency in the past three weeks. On Thursday the rouble fell to 55 against the euro, a record low for the Russian currency. Friday’s rate rise is significantly higher than the market expected, with most economists forecasting an increase of just 50 basis points. Analysts said the central bank had probably chosen to take serious action amid fears that in a country where local currency exchange stands advertise the rouble-dollar and rouble-euro exchange rate on every city block, local households had begun converting their savings from roubles. “The fast depreciation of the currency, in my opinion, was already creating the danger that we might see some kind of chaos on the domestic market for foreign exchange, with households going and converting their deposits [out of roubles],” said Ivan Tchakarov, chief economist for Russia and the CIS at Citi. Mr Tchakarov said policy makers were anxious to prevent a repeat of the 2008-2009 global financial crisis, when the central bank spent $200bn of its reserves to ensure a gradual devaluation of the rouble, rather than let the Russian electorate see its savings depreciate in one fell swoop. The central bank’s action highlights the serious economic and monetary challenges facing Russian policy makers as the country’s geopolitical isolation and the fall in oil price put increasing pressure on the economy. Economists expect Russia to enter recession next year on the back of lower oil prices, which now stand below $90 a barrel for the first time since April 2013. The central bank’s rate rise will only put further pressure on economic growth. Over the past few months, signs have emerged that Russia’s biggest corporate earners are suffering under the weight of sanctions which have targeted groups ranging from the country’s two biggest banks to its largest energy companies. This week, two Russian business newspapers – Alisher Usmanov’s Kommersant and Mikhail Prokhorov’s RBK – reported that state energy group Rosneft had submitted a list of proposals to the Russian government to protect the Russian economy and companies like Rosneft against future sanctions. The state oil company has already asked the Russian government for more than Rbs2tn ($47bn) from the state’s rainy day fund to help it weather the current crisis. The rate rise comes one day after the rouble recorded its biggest single-day gain against the dollar in more than a decade, rising as much as 5.5 per cent against the dollar during trading on Thursday, ahead of the expected rate increase. The central bank’s move will help target inflation: the weakened currency has been driving up the cost of imported goods. However, Russia is likely to have to continue digging into its reserves to prop up the currency, as traders bet on the rouble’s continued devaluation ahead of a planned free float in early 2015. Since the start of October, the central bank has spent more than $20bn supporting the rouble.
Posted on: Sun, 02 Nov 2014 08:11:06 +0000
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