In what is clearly being seen as crisis management, the Russian Central Bank hiked interest rates from 10.5% to 17% late night to stem the continued weakening of the Ruble against the US Dollar. The massive hike in interest rate, which was reportedly around 1AM in the night, goes to show how the Russian economy has been hit, not just by the US and EU led sanctions but also the falling Crude Oil prices. The Central Bank had in the past tried to intervene in the forex markets spending as much as $80 billion of its foreign exchange reserves in various unsuccessful attempts to support the falling Ruble.
The US Dollar rallied close to 12% yesterday to hit an all time high of 65.99 before easing down to the levels of 60 after news of the interest rate hike. The rate hike by the Russian Central Bank is being seen as a desperate move considering that the domestic economy will feel the pain of a 17% prevailing interest rate.
Last month, attempts to convince the OPEC community to cut production in order to support the falling Crude oil prices fell flat. With Russian economy closely tied to Oil exports, the falling Crude oil prices have made matters worse for the country which got itself entangled since it started interfering in Ukraine. It is estimated that the country is seeing close to $140 billion in losses due to the economic sanctions and falling crude oil prices. While a short bounce in Crude oil futures gave hopes, continued dovish comments from OPEC members such as Saudi Arabia and UAE, where recently one of the officials was reported to have said that even a $40 a barrel would not prompt production cuts has turned the outlook more bleaker for Russian alongside other non OPEC members including Venezuela.
With the Russian Central Bank previously forecasting no growth to the Russian economy for at least the next two years, the latest move by the CBR is likely to see some ripple effects with the possibility that economic growth could contract by as much as -6% while inflation could rise by 8% in the coming years. The crisis has also sparked many rumors especially about the CBR stocking up on Gold and the possibility that the country could peg its currency to the Gold standard and a capital flight to Europe, which is being seen as one of the reasons for the Euro’s gradual rally in recent weeks.
Past efforts by Russian President Vladimir Putin hasn’t had much of an effect despite echoing that Ruble speculators would be dealt with harshly and announcing tax amnesty for repatriation of the Ruble alongside a 4-year tax freeze in the corporate sector.
The latest move of hiking interest could only have some temporary effects on the Ruble, which has since weakened from the highs of 66, currently trading at 60.8. The only reprieve would be the FOMC’s statement coming out tomorrow. A no change to the Fed’s language bearing in mind the global slowdown could help support the Ruble for a little bit longer.