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To halt crisis, Russia central bank hikes interest rates as ruble falls To halt crisis, Russia central bank hikes interest rates as ruble falls
(about 5 hours later)
MOSCOW — In a surprise move intended to prop up Russia’s rapidly plummeting ruble, the Russian Central Bank imposed a massive interest rate hike in the middle of the night Tuesday. MOSCOW — Russia appeared headed Tuesday into a full-fledged currency crisis after the central bank imposed a massive, middle-of-the-night interest rate hike but failed to halt the plummet of the ruble.
The move, reminiscent of some of the extreme measures taken during Russia’s 1998 default, was intended to stanch the losses of a currency which as of a day earlier had lost more than half of its value against the dollar this year. But the central bank decision also carried perilous risks for the broader economy, underscoring the limited options available to fight the emerging crisis. The tactics have revived memories of Russia’s 1998 financial meltdown when the nation defaulted on debts and a generation’s savings was wiped out because of hyperinflation.
The move, announced on the central bank Web site at 1 a.m., hiked Russia’s main deposit rate to 17 percent from 10.5 percent, a massive and unusual leap that some analysts described as “shock and awe.” Now the key test will be how the markets respond. If the ruble does not stabilize, the central bank will have few remaining orthodox tools at its disposal. Russia has more crisis-fighting resources today, but the central bank decision also carried perilous risks for the broader economy.
Russian policymakers have quickly grown nervous about the challenges facing their economy. Earlier this month, President Vladimir Putin vowed “harsh” measures against “speculators” who he said were pushing down the value of the ruble. So far this year, the ruble has lost more than half its value against the U.S. dollar, a decline closely linked to the falling price of oil — Russia’s main export — and Western sanctions imposed because of Russia’s actions in the conflict in Ukraine.
Russia’s government expects inflation to top 10 percent by the end of this year and for the economy to fall into a recession next year, a dangerous combination that can be very difficult to escape. The rate hike — the largest since 1998 — was intended to cap inflation and encourage Russians to keep their savings in rubles instead of switching them to foreign currencies. By midday Tuesday, the ruble slid more than 8 percent on top of a Monday swoon of more than 10 percent. The continued decline was a sign that investors were rejecting the central bank’s intervention.
But it also carried the substantial risk of dealing a broader blow to the economy, already hit by Western sanctions and the crash in the price of oil. The bank said Monday that if oil holds at $60 a barrel next year, Russia’s economy may shrink up to 4.7 percent, the most since 2009. The move, announced on the central bank Web site at 1 a.m., hiked Russia’s main deposit rate to 17 percent from 10.5 percent, an unusual leap that some analysts described as “shock and awe.” Other emerging markets have occasionally imposed similar rate hikes, also during currency crises.
“This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks,” the central bank said in a terse statement on its website announce the rate hike. Russian policymakers have quickly grown nervous about the challenges facing their economy. Earlier this month, President Vladimir Putin vowed “harsh” measures against “speculators” he blamed for pushing down the value of the ruble.
There have been signs of runs on stores in recent weeks, as Russians have been rushing to buy pricey items for fear that their savings will evaporate. Car stores’ sales have risen since November, for example. On Tuesday, Russian deputy prime minister, Olga Golodets, said poverty would “inevitably rise” because of inflation. Higher interest rates also makes it more expensive for consumers and businesses to borrow money, crimping spending and investment.
The massive rate hike was the latest sign that Russian policymakers are running out of options in a fast-moving economic crisis. The central bank has tried to slow the ruble’s decline by selling off its foreign-exchange reserves this year, but it has spent more than $80 billion this year to little effect. Russia’s government expects inflation to top 10 percent by the end of this year and the economy to fall into a recession next year, a dangerous combination that can be very difficult to escape. The rate hike — the largest since 1998 — was intended to cap inflation and encourage Russians to keep their savings in rubles instead of switching them to foreign currencies.
On Monday alone, the ruble lost more than 10 percent against the dollar, compounding losses that have accelerated since October. As of Monday, one dollar bought more than 64 rubles, compared to 33 at the beginning of the year. But it also carried the substantial risk of dealing a broader blow to the economy. The bank gave a gloomy forecast Monday: If oil holds at $60 a barrel next year, Russia’s economy may shrink up to 4.7 percent. That would be the biggest contraction since 2009 — and the bank’s prediction came before the latest rate hike.
The turmoil has brought to mind Russia’s unsteady 1990s, when the economy was plagued by booms and busts as the nation emerged from Communist rule. The number of Russians worried about the economy has ballooned in recent opinion polls, carrying with it a risk for Putin, who has made stability a key part of his appeal to his constituents. So far, his popularity remains near record highs. “It is very important that the economy can adapt to new conditions. These new conditions demand a change in behavior,” Central Bank President Elvira Nabiullina said on Tuesday in an interview that was broadcast on Russian state television. “We will be getting rid of expensive imported goods and we will be replacing them with local made goods which will be affordable.”
The central bank’s late-night move surprised many analysts, especially since it came only days after the central bank imposed a much more modest rate increase. But after last week’s announcement that rates would rise to 10.5 percent from 9.5 percent, the ruble immediately kept spiking. Some analysts say that tougher controls on prices and on currency transactions may not be far away. By midday Tuesday, one dollar bought 74 rubles, compared to 58 on Friday and 33 at the beginning of the year.
“If today’s measures fail to stem the ruble rout, there is a high probability that policy will veer in a more unorthodox direction,” said Alexander Kliment, an economic analyst at the Eurasia Group, in a research note. “Some top advisers to Putin are openly hostile to rate hikes.” Russia’s moves Tuesday did not appear to rattle global markets. Asian stocks slid, but mostly based on Chinese manufacturing data. European markets moved higher and Wall Street also seemed poised to rebound.
But others thought that Tuesday’s move may be enough for now. There have been signs of runs on stores in recent weeks. Russians have been rushing to buy pricey items in fear that their purchasing power was shrinking. Car sales have risen since November, for example.
The “rate hike could prove to be a turning point in the 2014 ruble crisis,” said Neil Shearing, an economist at Capital Economics, a consultancy. In at least some Moscow grocery stores on Tuesday, stocks of basic goods were unusually low.
One woman who declined to identify herself appeared to be traveling from store to store taking careful notes about the price of buckwheat, a Russian food staple whose price has skyrocketed in recent months.
The massive rate hike was the latest sign that Russian policymakers are running out of options. The central bank has tried to slow the ruble’s decline by selling off its foreign-exchange reserves this year, but it has spent more than $80 billion this year to little effect.
One close Putin ally on Tuesday blamed the economic difficulties on a lack of confidence in Russian leaders.
The rate hike “was a forced decision but the right one,” former finance minister Alexei Kudrin wrote on Twitter on Tuesday. “This decision should be followed by decisions of the government aimed at improving the trust of investors toward the Russian economy.”
Russia is still sitting on the world’s fourth-largest currency reserves, but the stockpile has shrunk to the lowest since 2009. Analysts warn that much of the $416 billion in reserves is not actually available for fighting a crisis that Russian leaders expect may last for years.Russia is still sitting on the world’s fourth-largest currency reserves, but the stockpile has shrunk to the lowest since 2009. Analysts warn that much of the $416 billion in reserves is not actually available for fighting a crisis that Russian leaders expect may last for years.
The sharp decline in the ruble in recent months has been closely tied to the dropping price of oil, Russia’s main export. But Western sanctions over Russia’s actions in Ukraine this year have also started to bite the economy. Russia’s main banks now face sharp limits in long-term borrowing from Western markets. And Russian energy companies can no longer buy key Western technology, restricting their ability to develop new oil and gas fields. The turmoil has brought to mind Russia’s unsteady 1990s, when the economy was plagued by booms and busts as the nation emerged from Communist rule. The number of Russians worried about the economy has ballooned in recent opinion polls, carrying with it a risk for Putin, who has made stability a centerpiece of his appeal.
So far, his popularity remains near record highs. But pollsters warn that the high numbers may be challenged by the economy.
“If the economic troubles last a long time, this will be a new situation that Putin’s regime has never been in,” said Denis Volkov, a pollster at Moscow’s independent Levada polling agency. “For almost all the time” since Putin rose to power at the end of 1999, Volkov said, “there has been economic growth and no trouble.”
The central bank’s late-night move surprised many analysts, coming only days after the central bank imposed a much more modest rate increase. Some analysts say that tougher controls on prices and on currency transactions may not be far away.
“If today’s measures fail to stem the ruble rout, there is a high probability that policy will veer in a more unorthodox direction,” said Alexander Kliment, an economic analyst at the Eurasia Group, in a research note. “Some top advisers to Putin are openly hostile to rate hikes.”