Russia is braced for more financial turmoil after a major interest rate hike failed to stop a sharp slide in the value of the rouble, and plunging oil prices and western sanctions continued to undermine confidence in the country’s economy.
The rouble enjoyed a brief surge following an overnight decision by Russia’s central bank to raise its key interest rate to 17 per cent from 10.5 per cent, but the sell-off quickly resumed as oil tracked lower.
The currency slipped to 100 against the euro and 80 to the US dollar, before recouping some value after US secretary of state John Kerry praised recent "constructive moves" by Russia in conflict-torn Ukraine.
Many analysts saw the uptick as only brief respite, however, and predicted that the rouble – which has shed more than half its value against the US dollar this year – would remain under heavy pressure until oil prices rebounded from levels last seen in 2009.
"The situation is critical. What is happening could not be imagined even in our nightmares a year ago," said Sergei Shvetsov, a deputy chairman of the central bank.
Problems ahead
“The choice . . . the central bank made was a choice between the very bad and the very, very bad,” Mr Shvetsov said of an interest rate hike that failed to support the rouble.
“There are many problems. In the days ahead, I think the situation will be comparable with the toughest period of 2008. I think the experience gained through many crises will help us to find the right solution and survive this situation.”
The major oil-producing states of Opec, of which Russia is not a member, have rejected talk of a cut in production to support prices, leaving Moscow to face the prospect of a sharp fall in revenues that could severely strain the state budget.
Russia relies on oil and gas revenue to finance more than half its budget, and government spending plans are built around a predicted oil price of $100 a barrel; oil was last night trading below $60 a barrel, having lost almost half its value since June.
As well as driving up prices and fuelling Russians’ fears of a repeat of the devastating 1998 financial crash, rouble weakness makes it more costly to service foreign debt repayments that are due to hit $120 billion (€96 billion) next year.
Worst performer
The country’s main stock market plunged more than 12 per cent during trading yesterday and, as the rouble replaced Ukraine’s hryvnia as this year’s worst performing currency, analysts said the central bank may soon limit the withdrawal of foreign currency.
More than $100 billion has left Russia in capital flight this year, as its economy slowed dramatically and the West imposed sanctions over Moscow’s annexation of Crimea and its support for separatist rebels in Ukraine.
Russian officials said there were no plans to introduce capital controls, however, and the state still has more than $400 billion in foreign currency reserves, despite having spent almost $100 billion propping up the rouble this year.
Tim Ash, head of emerging markets research at Standard Bank, said the credibility of Russia's central bank was in question after "the most incredible currency collapse I think I have seen in 17 years in the market and 26 years" covering Russia and ex-Soviet states.
