Only a few weeks ago Russian bankers, corporate executives and government officials described the country’s economic woes as manageable, albeit painful. Yesterday, with the rouble plummeting nearly 20 per cent against the dollar before recovering some of its losses, they compared the situation to a full-blown currency crisis akin to that of 1998.
“We are floating towards the waterfall, and there’s nothing that can stop us,” said an executive at a financial holding.
Many investors blame Russia’s central bank. In a desperate last-ditch effort to regain control, the bank raised interest rates by a hefty 6.5 percentage points to 17 per cent at 1am yesterday.
But the move failed to tame the market with “shock and awe” as this appeared to be the furthest the regulator was ready to go.
Intervention
“The market had positioned itself for the expectation that the central bank would intervene hugely, and that didn’t materialise. In fact, we’re not confident that they were in the market at all today,” said
Tom Levinson
, chief foreign exchange and rates strategist at
Sberbank
CIB in
Moscow
.
Analysts said the bank would have needed to follow up by selling up to $30 billion. When that did not come, ordinary Russians started converting their rouble savings into foreign currency, pushing the local currency over the edge again.
“This latest drop is driven by retail activity – people are converting their savings into foreign currencies because they are worried that the rouble is losing value,” said Mr Levinson.
“To respond to that, the person on the street needs to see some sort of stability in the exchange rate. An interest rate hike, in isolation, will not achieve it.”
The Bank of Russia is trying to defend itself against criticism. "We believe that the rouble is now undervalued by all parameters – the state of the economy as well as the balance of payments," central bank governor Elvira Nabiullina said. "But it takes time for it to reach a valuation based on fundamentals."
However, experts say time is running out for Russia. “Having run down $75 billion in foreign reserves this year to defend the rouble to no avail, having thrown away a whole toolbox for slowing down the depreciation of the currency by floating it, and having hiked interest rates to a level where they are choking the economy, the central bank has driven itself into a corner,” said the Russian executive. – Copyright The Financial Times Limited 2014
