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Russia’s Steep Rate Increase Fails to Stem Ruble’s Dive Russia’s Steep Rate Increase Fails to Stem Ruble’s Dive
(35 minutes 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 — Despite the Russian central bank’s extraordinary move to defend the currency, the ruble’s value continued to slide on Tuesday, 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. Russians rushed to appliance stores to buy washing machines or televisions to unload rubles. Car dealerships including Volvo in Russia halted business, unsure of prices.
By afternoon Tuesday, a sense of economic chaos had settled over the Russian capital. The ruble was in free fall, dropping to below 80 rubles from the dollar after opening the day at 64 to the dollar.
“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. The Russian economy is getting battered by the painful combination of Western sanctions and low oil prices. The country is expected to fall into a recession next year.
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. Global markets are increasingly concerned that tumult in Russia may not be isolated.
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. Many emerging markets like Venezuela and Nigeria are dependent on their energy exports, which are getting hurt by the deep and sustained declined in oil prices. Oil is now trading at around $55 a barrel, compared to more than $100 this summer.
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. Emerging markets are also under pressure as the Federal Reserve in the United States shifts strategy. Some countries like Turkey and South Africa have depended heavily on external financing to fund their growth, and they have been hurt by expectations that the Fed will raise rates.
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. “There is country-specific risk for Russia; that’s not going to go away,” said ​Phyllis Papadavid, a foreign exchange strategist at BNP Paribas in London. “But there’s a larger story.”
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. In Russia, investors are growing increasingly worried that the Kremlin has in effect decided to print money to address a growing debt problem. Traders are also raising concerns that the cronyism and opaque insider dealings that have plagued business here had now spread to monetary policy.
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. According to analysts, the ruble’s fall on Monday was sparked by 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.
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. The governor of the Central Bank, Elvira Nabiullina, speaking on Russian television, said the interest rate decision had been made to stanch the fall of the ruble. In its moves, the Russian 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.
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. “We have to learn to live in a different zone, to orient ourselves more towards our own sources of financing,” she said.
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. But traders have long fretted that Ms. Nabiullina, a former economy minister, lacked the political spine to stand up to Mr. Putin or his longtime allies like Mr. Sechin. And yet, though the absence of any credible independence by the Central Bank is at the heart of the ruble crisis today, it’s unclear any figure in Russia could provide it, given the ever more authoritarian nature of Mr. Putin’s rule.
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. Aleksei L. Kudrin, a former finance minister, wrote on Twitter that “the fall of the ruble and the stock market is not just a reaction to the low price of oil and to sanctions, but also due to a lack of confidence in the government’s economic policy.”
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. In the oil boom years, the government of Mr. Putin assumed an ever-larger role in the economy. Longtime associates of Mr. Putin’s from his hometown of St. Petersburg or his years in the Soviet KGB intelligence agency took the helms of huge new state-owned enterprises. All the while, the central bank and a liberal wing of economic policy advisers had kept aloof from this politically driven divvying up of assets.
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. Now, market sentiment is shifting. 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 West have frayed.
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. He faces a particularly delicate dance with Russia companies, which are under significant financing strains. Russian corporations and banks are scheduled to repay $30 billion in foreign loans this month.
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.
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.”
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.
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.
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.
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.
Rosneft, for example, had been clamoring for months 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. 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.
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 deal roiled the ruble on Monday, according to analysts.
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.” Rosneft, in a statement, denied it had exchanged funds raised from the bonds for hard currency.
“This is a result of aggression and insanity in foreign policy, which led to sanctions,” Mr. Nemtsov wrote of the ruble collapse.