Russian rouble in free-fall despite shock 17pc rate rise

Russian rouble in free-fall despite shock 17pc rate rise

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Russia’s rouble went into free-fall in Tuesday trading, falling repeatedly to record lows, despite the central bank’s dramatic decision to raise interest rates from 10.5% to 17%.
The rate rise was meant to strengthen the currency. It helped the rouble to 58 to the dollar early on Tuesday, but the dollar now buys as many as 77 roubles.
The rouble has lost more than 50% against the US dollar this year, hit by oil price falls and Western sanctions. Both of these have weakened the economy.Russia’s central bank has now pledged fresh further measures to try to stabilise its currency, with First Deputy Governor Sergei Shvetsov describing the situation as “critical”.
‘Extraordinary measures’
Last week, Russia raised rates to 10.5% from 9.5%, a move that had little impact. The rouble’s slide this week was prompted by fears that the US was considering a fresh set of sanctions against the country for its support for separatists in Ukraine.
Russian oil giant Rosneft’s decision to issue 625bn roubles ($9.9bn) worth of bonds late last week at lower rates than Russian bonds has been blamed by some for exacerbating the currency’s decline.
But Rosneft denied it was trying to dump roubles, saying “not a single rouble” would be used to buy foreign currency.”
The chairwoman of the Russian Central Bank, Elvira Nabiullina, said the latest rate rise should curb inflation and encourage Russians to put more roubles into interest rate-bearing accounts.
However, she said she did not expect the rouble’s value to be immediately influenced by the rate rise.
“The rouble is currently undervalued according to all fundamental parameters and the state of the economy… and the current account,” she said. “But for the rouble to return to its fundamental exchange rate it would take time.”
Laith Khalaf, senior analyst at brokers Hargreaves Lansdown, said: ‘The Russian central bank has moved to battle stations to defend its currency. So far the move has not stopped the slide, and it may yet have negative effects on the Russian economy.
“For investors wanting exposure to Russia, a long-term horizon and a strong stomach are both an absolute must.”
Russia’s central bank has previously tried unsuccessfully to stabilise the currency, buying roubles in the markets.
It has spent more than $70bn (£44.7bn) supporting the rouble since the start of the year.
“This decision is aimed at limiting substantially increased rouble depreciation risks and inflation risks,” the central bank said in a statement.
Last week, the World Bank warned that Russia’s economy would shrink by at least 0.7% in 2015 if oil prices did not recover. It says an oil price of $70 a barrel would leave it with a fall of 1.5%.
Capital Economics’ latest prediction is for a contraction of 2%, should the price of oil remain close to its current price of $60 a barrel.
Raising interest rates has its own risks, as more expensive borrowing can itself slow growth. But it may also stem the tide of money leaving the country.
Oil prices are at levels not seen for five-and-a-half years. US benchmark crude West Texas Intermediate is below $55 a barrel, while North Sea Brent crude is trading below $60 a barrel. Both benchmarks have fallen by almost half since June. – BBC News

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