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Ruble Continues Its Decline in Russia, Despite Interest Rate Increase Russia’s Steep Rate Increase Fails to Stem Ruble’s Dive
(about 3 hours later)
MOSCOW — The ruble’s value continued to slide on Tuesday despite the Russian central bank’s extraordinary effort to defend it, inducing further panic in the nation’s financial industry and presenting President Vladimir V. Putin with an acute new set of political and economic challenges.MOSCOW — The ruble’s value continued to slide on Tuesday despite the Russian central bank’s extraordinary effort to defend it, inducing further panic in the nation’s financial industry and presenting President Vladimir V. Putin with an acute new set of political and economic challenges.
Scenes that Russians hoped had receded into the past reappeared on the streets: Currency exchange signs blinked ever-changing digits, and Russians rushed to appliance stores to buy washing machines or televisions to unload rubles.Scenes that Russians hoped had receded into the past reappeared on the streets: Currency exchange signs blinked ever-changing digits, and Russians rushed to appliance stores to buy washing machines or televisions to unload rubles.
“We are seeing an economic crisis,” Natalia V. Akindinova, a professor at the Higher School of Economics, said in a telephone interview. “We are seeing a sharp devaluation of the ruble at a time when the central bank doesn’t have the reserves to influence the market, as it did in the past crises.”“We are seeing an economic crisis,” Natalia V. Akindinova, a professor at the Higher School of Economics, said in a telephone interview. “We are seeing a sharp devaluation of the ruble at a time when the central bank doesn’t have the reserves to influence the market, as it did in the past crises.”
Despite the decision by the Central Bank of Russia to raise its short-term interest rate in the middle of the night to 17 percent from 10.5 percent, the value of the currency continued to slip on Tuesday after initially showing signs of stabilizing. The interest rate move came after the ruble fell 10 percent on Monday.Despite the decision by the Central Bank of Russia to raise its short-term interest rate in the middle of the night to 17 percent from 10.5 percent, the value of the currency continued to slip on Tuesday after initially showing signs of stabilizing. The interest rate move came after the ruble fell 10 percent on Monday.
In afternoon trading, the Russian currency resumed its fall to record lows, with the dollar rising above 79 rubles in spite of the bank’s policy shift.In afternoon trading, the Russian currency resumed its fall to record lows, with the dollar rising above 79 rubles in spite of the bank’s policy shift.
Of particular concern in the financial markets were fears that the Kremlin had in effect decided to print money to address a growing debt problem. Worries that the central bank had effectively issued new rubles to prop up the national oil company Rosneft were among the factors that prompted the dramatic sell-off of rubles on Monday.Of particular concern in the financial markets were fears that the Kremlin had in effect decided to print money to address a growing debt problem. Worries that the central bank had effectively issued new rubles to prop up the national oil company Rosneft were among the factors that prompted the dramatic sell-off of rubles on Monday.
With pressure mounting, the bank appeared to have lapsed into a “policy of printing money,” Ms. Akindinova said, to aid the state oil company pinched by low oil prices and financial sanctions over the Ukraine crisis.With pressure mounting, the bank appeared to have lapsed into a “policy of printing money,” Ms. Akindinova said, to aid the state oil company pinched by low oil prices and financial sanctions over the Ukraine crisis.
Traders suggested that they had been spooked by concerns that the cronyism and opaque insider dealings that have long plagued business here had spread to monetary policy.Traders suggested that they had been spooked by concerns that the cronyism and opaque insider dealings that have long plagued business here had spread to monetary policy.
The central bank also increased allotments of dollars to the Russian banking system, to finance the purchase of rubles as part of the effort to stabilize the currency.The central bank also increased allotments of dollars to the Russian banking system, to finance the purchase of rubles as part of the effort to stabilize the currency.
The interest rate increase and the inflation that comes with a sharp fall in the value of a currency are creating additional pressures on the Russian economy, which has been buffeted by plunging oil prices and the effect of Western sanctions imposed by the United States and the European Union on Russia because of its involvement in the Ukraine conflict.The interest rate increase and the inflation that comes with a sharp fall in the value of a currency are creating additional pressures on the Russian economy, which has been buffeted by plunging oil prices and the effect of Western sanctions imposed by the United States and the European Union on Russia because of its involvement in the Ukraine conflict.
A continued fall in the value of the ruble could present Mr. Putin with difficult choices and could make it more difficult to sustain the political support he has enjoyed at home even as his relations with the United States and Europe have frayed.A continued fall in the value of the ruble could present Mr. Putin with difficult choices and could make it more difficult to sustain the political support he has enjoyed at home even as his relations with the United States and Europe have frayed.
Though the fall in the price of oil, a major Russian export commodity, has been whittling away at the ruble for months, oil prices actually ticked up on Monday. The immediate cause of that day’s plunge, analysts say, was word of an opaque deal involving the central bank and the state-controlled oil company, Rosneft.Though the fall in the price of oil, a major Russian export commodity, has been whittling away at the ruble for months, oil prices actually ticked up on Monday. The immediate cause of that day’s plunge, analysts say, was word of an opaque deal involving the central bank and the state-controlled oil company, Rosneft.
The well-connected business executive running the company, Igor I. Sechin, a longtime associate of Mr. Putin, had apparently persuaded the central bank to effectively issue billions of new rubles to his company to help cover debts.The well-connected business executive running the company, Igor I. Sechin, a longtime associate of Mr. Putin, had apparently persuaded the central bank to effectively issue billions of new rubles to his company to help cover debts.
For months, Rosneft had been clamoring for a government bailout to refinance debt the company ran up while making acquisitions when oil prices were high. Because of sanctions, those loans cannot be rolled over with Western banks.For months, Rosneft had been clamoring for a government bailout to refinance debt the company ran up while making acquisitions when oil prices were high. Because of sanctions, those loans cannot be rolled over with Western banks.
Debt payments are coming due later this month. Relying only on the company’s own cash reserves would disrupt oil development projects on which Russia is relying for future revenue.Debt payments are coming due later this month. Relying only on the company’s own cash reserves would disrupt oil development projects on which Russia is relying for future revenue.
With the oil giant in a bind, the central bank ruled that it would accept Rosneft bonds held by commercial banks as collateral for loans.With the oil giant in a bind, the central bank ruled that it would accept Rosneft bonds held by commercial banks as collateral for loans.
Rosneft issued 625 billion rubles, about $10.9 billion at the exchange rate at the time, in new bonds on Friday. The identities of the buyers were not publicly disclosed, but analysts say that large state banks bought the issue.Rosneft issued 625 billion rubles, about $10.9 billion at the exchange rate at the time, in new bonds on Friday. The identities of the buyers were not publicly disclosed, but analysts say that large state banks bought the issue.
When these banks deposit the bonds with the central bank in exchange for loans, Rosneft will have been financed, in effect, with an emission of rubles from the central bank.When these banks deposit the bonds with the central bank in exchange for loans, Rosneft will have been financed, in effect, with an emission of rubles from the central bank.
The disclosure of the government’s brokered solution for Rosneft shook the market on Monday, apparently because it resembled the practice of so-called monetizing deficits, or printing money, to pad a government budget.The disclosure of the government’s brokered solution for Rosneft shook the market on Monday, apparently because it resembled the practice of so-called monetizing deficits, or printing money, to pad a government budget.
Not surprisingly, the ruble, trading at about 57 to the dollar Monday morning, collapsed to 64 rubles to the dollar by the end of the day, its worst one-day sell-off since Russia defaulted on its debts in 1998.Not surprisingly, the ruble, trading at about 57 to the dollar Monday morning, collapsed to 64 rubles to the dollar by the end of the day, its worst one-day sell-off since Russia defaulted on its debts in 1998.
The reason for Monday’s currency crash is “well known,” Boris Y. Nemtsov, a former deputy prime minister who is now in the political opposition, wrote on his Facebook page. “The central bank started the printing press to help the Sechin-Putin business, and gave Rosneft 625 billion newly printed rubles. The money immediately appeared on the currency market, and the rate collapsed.”The reason for Monday’s currency crash is “well known,” Boris Y. Nemtsov, a former deputy prime minister who is now in the political opposition, wrote on his Facebook page. “The central bank started the printing press to help the Sechin-Putin business, and gave Rosneft 625 billion newly printed rubles. The money immediately appeared on the currency market, and the rate collapsed.”
As markets absorbed the Russian news on Tuesday, stocks in Asia ended generally lower and the yen, a refuge currency for investors, hit a four-week high. European stocks overcame early losses to trade higher through midday.As markets absorbed the Russian news on Tuesday, stocks in Asia ended generally lower and the yen, a refuge currency for investors, hit a four-week high. European stocks overcame early losses to trade higher through midday.
Brent crude oil, an international benchmark, fell $1.96 to $59.25 in midday trading in London on Tuesday.Brent crude oil, an international benchmark, fell $1.96 to $59.25 in midday trading in London on Tuesday.
Before the Rosneft bond issue, the government had indicated to investors that it intended to cut about 500 billion rubles from next year’s budget, in effect reducing ruble liquidity by an amount commensurate with the Rosneft bond issue.Before the Rosneft bond issue, the government had indicated to investors that it intended to cut about 500 billion rubles from next year’s budget, in effect reducing ruble liquidity by an amount commensurate with the Rosneft bond issue.
In the years of the oil boom, Mr. Putin’s government assumed an ever-larger role in the economy. Longtime associates of Mr. Putin’s from St. Petersburg, his hometown, or from his years in the Soviet intelligence agency the K.G.B., took the helm at huge state-owned enterprises.In the years of the oil boom, Mr. Putin’s government assumed an ever-larger role in the economy. Longtime associates of Mr. Putin’s from St. Petersburg, his hometown, or from his years in the Soviet intelligence agency the K.G.B., took the helm at huge state-owned enterprises.
All the while, the central bank and a liberal wing of economic policy advisers had remained aloof from the politically driven divvying up of assets.All the while, the central bank and a liberal wing of economic policy advisers had remained aloof from the politically driven divvying up of assets.
But now, in the view of financial traders and holders of Russian debt, the central bank’s decision to accept Rosneft bonds as collateral for loans seems to set an ominous precedent. Russian corporations and banks are scheduled to repay $30 billion in foreign loans this month.But now, in the view of financial traders and holders of Russian debt, the central bank’s decision to accept Rosneft bonds as collateral for loans seems to set an ominous precedent. Russian corporations and banks are scheduled to repay $30 billion in foreign loans this month.
And next year, about $130 billion will come due. There is no obvious source for these hard currency payments other than the central bank, whose credibility is now being called into question.And next year, about $130 billion will come due. There is no obvious source for these hard currency payments other than the central bank, whose credibility is now being called into question.