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Russia’s major interest rate hike fails to halt ruble’s plummet Russia imposes steep interest rate hike as ruble plummets
(about 5 hours later)
MOSCOW — Russia appeared headed Tuesday toward a full-fledged currency crisis after the central bank imposed a massive, middle-of-the-night interest rate hike but failed to halt the ruble’s plunge. MOSCOW — Russia on Tuesday appeared headed for the worst economic turbulence in President Vladimir Putin’s 15 years in power, raising fundamental questions about the future of the country as investors’ trust in its basic institutions seemed to be eroding fast.
The tactics have revived memories of Russia’s 1998 financial meltdown, when the nation defaulted on debts and hyperinflation wiped out a generation’s savings. The fear was sparked by the plummeting ruble, which has dropped 17 percent against the dollar in just two days despite a dead-of-Tuesday-night decision by the Russian central bank to impose a steep interest rate hike to stem the currency losses.
Russia has more crisis-fighting resources today, but the central bank decision also carried perilous risks for the broader economy. Putin remains tremendously popular in Russia, but his rule has long been predicated on a basic bargain with voters: They gain economic prosperity and stability in exchange for acquiescence to a political life devoid of real opposition. His half of the deal now appears in question.
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 Ukraine conflict. At one point Tuesday, a dollar could buy 79 rubles, an extraordinary development for a currency that stood at 33 rubles to the dollar in January and held mostly steady for much of the year. Later Tuesday, the currency stabilized closer to 68 to the dollar.
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. The crisis consumed the attention of Russia’s elite on Tuesday, with Putin keeping in close touch with other government leaders, Prime Minister Dmitry Medvedev convening an emergency meeting, and the state-run news station devoting almost wall-to-wall coverage to the fast-breaking developments. Some analysts wondered whether the central bank president or other senior leaders might soon be replaced.
The move, announced on the central bank Web site at 1 a.m. Tuesday, 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. The sharp interest rate hike — from 10.5 percent to 17 percent — promised to throw Russia’s economy into a deep recession next year, and it was a sign that Russian policymakers feel they have few options left to fight the crisis.
Russian policymakers have quickly grown nervous about the challenges facing their economy. Earlier this month, President Vladimir Putin vowed “harsh” measures against “speculators” he accused of pushing down the value of the ruble. On Tuesday, top economic officials said, in effect, that Russians would simply have to get used to worsened living standards. Deputy Prime Minister Olga Golodets said poverty would “inevitably rise” because of inflation. Elvira Nabiullina, president of the central bank, said that “these new conditions demand a change in behavior,” one that involves “getting rid of expensive imported goods” and replacing them with cheaper Russian ones.
On Tuesday, Russian deputy prime minister, Olga Golodets, said poverty would “inevitably rise” because of inflation. Higher interest rates also make it more expensive for consumers and businesses to borrow money, crimping spending and investment. Putin did not publicly address the crisis on Tuesday, but his spokesman said that much of an annual news conference to be held Thursday would be devoted to the economy.
The Russian government expects inflation to top 10 percent by the end of the year and the economy to fall into a recession next year, a dangerous combination. 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. The central bank tactics have revived memories of Russia’s 1998 financial meltdown, when the nation defaulted on debts and hyperinflation wiped out a generation’s savings. Buoyed by rising oil prices, Putin devoted much of his early years to building institutions that would preserve economic stability. As a result, Russia still has far more crisis-fighting resources today than it did then, including the world’s fourth-largest currency reserves. They stood at $416 billion at the beginning of the month, down $80 billion this 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. So far, Putin’s popularity remains near record highs. But pollsters warn that economic distress may challenge the high numbers.
“It is very important that the economy can adapt to new conditions. These new conditions demand a change in behavior,” Elvira Nabiullina, the president of the central bank, said 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.” “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 at Moscow’s independent Levada polling agency.
By midday Tuesday, one dollar bought 74 rubles, compared with 58 on Friday and 33 at the beginning of the year. Retailers said Tuesday that some Russians were rushing to purchase large-ticket items such as cars and appliances before they are marked up to new exchange rates. That sparked unpleasant memories from 1998, when consumers tried to convert their savings into purchases that would hold their value. But grocery stores appeared to be fully stocked.
Russia’s moves Tuesday did not appear to rattle global markets. Asian stocks slid, but mostly over Chinese manufacturing data. European markets were mixed; Wall Street seemed poised to rebound. Russia’s economy was already in trouble before the March annexation of Ukraine’s Crimean Peninsula and subsequent support for pro-Russian rebels in eastern Ukraine. Those decisions sparked Western sanctions and the worst tensions between Russia and the West since the Cold War. The unpredictable environment has spooked investors, which the central bank predicts will pull $128 billion from Russia this year.
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. The rapidly souring economic conditions may spur Russia to be more conciliatory on Ukraine. On Tuesday, Russian Foreign Minister Sergei Lavrov reversed a call for Kiev to cede more power to Ukraine’s regions, a basic Russian demand since pro-Moscow Ukrainian President Viktor Yanukovych was toppled in February.
In at least some Moscow grocery stores on Tuesday, stocks of basic goods were unusually low. “This is for Ukrainians to decide,” Lavrov said in an interview with France 24 television. “We’re not suggesting federalization, we’re not suggesting autonomy,” he said, although he and Putin have repeatedly proposed exactly that. A new cease-fire in Ukraine’s east that started last week appears to be mostly holding, although NATO and Ukraine say that Russia has reinforced its positions in eastern Ukraine in recent weeks. Russia denies sending troops there.
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. Secretary of State John F. Kerry praised the Russian moves on Tuesday, raising the prospect of an easing of sanctions. “There are signs of constructive choices,” Kerry told reporters in London, referring to the cease-fire.
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. The Russian government expects inflation to top 10 percent by the end of the year and the economy to fall into a recession next year, a dangerous combination. Tuesday’s 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.
One close Putin ally on Tuesday blamed the economic difficulties on a lack of confidence in Russian leaders. Russia’s 1998 default helped spark a broader global crisis, hitting emerging economies. So far, fears that this crisis could spread appear muted, although neighbors such as Kazakhstan and Belarus also have experienced pressure. Asian stocks slid Tuesday, but mostly over Chinese manufacturing data. European markets were mixed, and Wall Street was rebounding. Russian companies are indebted to Western banks, but analysts said Tuesday that even a partial default would probably not on its own deal a grievous blow to the global system.
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.” Instead, the panic in Russia raised questions about the country’s fundamental economic model, which is heavily dependent on energy revenue, analysts said.
Russia is still sitting on the world’s fourth-largest currency reserves, but the stockpile has shrunk to its lowest level 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 years. “We have lost trust between business and the state. It’s systemic,” said Evgeny Gontmakher, a former economic adviser to Medvedev who works at the Institute of Contemporary Development, a liberal policy organization. “It could be a big turning point, not only for the economy, but for Russia.”
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. In recent months, the ruble has shed value hand-in-hand with oil prices. But the ruble selloff that started Monday — a day in which oil prices were flat — was sparked by worries about a complicated, opaque transaction late last week in which the central bank appeared to have printed currency to indirectly finance oil giant Rosneft, analysts said. Rosneft, majority-owned by the Russian state, has been stung by the sanctions and the falling energy prices. Rosneft head Igor Sechin, a Putin confidant, denied Tuesday that anything untoward had occurred.
So far, his popularity remains near record highs. But pollsters warn that the high numbers may be challenged by the economy. “In the last couple of days, oil has stayed completely stable and yet Russia had a total panic,” said Sergei Guriev, an economist at the Sorbonne in Paris. “This panic is triggered by the realization that the Russian government has no idea what to do.”
“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.” Many Russians, although concerned about the economy, said Tuesday that they did not blame Putin for the problems.
The central bank’s late-night move surprised many analysts, coming only days after it imposed a much more modest rate increase. Some analysts say that tougher controls on prices and on currency transactions may not be far away. “Everything is more expensive — the price of groceries, everything. Salaries aren’t growing, but everything else is rising,” said Zhana Krivarogova, 55, outside a central Moscow store. “Right now things are hard, but you know the Russian people — we’re used to it.”
“If today’s measures fail to stem the ruble rout, there is a high probability that policy will veer in a more unorthodox direction,” Alexander Kliment, an economic analyst at the Eurasia Group, said in a research note. “Some top advisers to Putin are openly hostile to rate hikes.”