Russian currency crisis

December 16, 2014

Russia's Central Bank Governor Nabiullina applauds during the VTB Capital "Russia Calling!" Investment Forum in Moscow

After the central bank dramatically raised interest rates by 6.5 percentage points to 17 percent overnight, Russia has given up any pretence that it is not in the grip of a currency crisis.

The rouble leapt nine percent versus the dollar in early Moscow trade but has since given up more than half those gains.

A 1 point interest rate rise last Friday failed to arrest its slide, the economy is subsiding into recession and inflation is well above the central bank’s target at over 9 percent, with a weaker currency serving to push import prices higher. As of the end of last week, the rouble had dropped more than 40 percent since mid-year.

If this does not do the trick, the only options would be capital controls, which the Kremlin has said it won’t impose, for the central bank to continue burning through its reserves or give up the ghost and allow the rouble to find its own level.

What is beyond Moscow’s control is the oil price, which has fallen again back towards $60, and the grip of western sanctions imposed over Ukraine. It appears a Rubicon was crossed on Monday when the rouble and Russian stocks plunged to new lows on concern about possible new U.S. sanctions.

A bill passed by the U.S. Congress after Russian markets closed on Friday set out tougher sanctions. Barack Obama has not signed it into law and has opposed further measures against Russia unless Europe joins in.

One big question is how much pain this level of interest rates will inflict on the Russian people. President Vladimir Putin’s high popularity ratings are based at least partly on bringing stability and prosperity to more Russians.

The nearest recent parallel is Turkey which whacked up interest rates by more than four percentage points in January to defend the lira. Rates have eased back a little, but only a little, since so it’s likely that Russia will have to live with rates of this sort of order for some considerable time.

Russia at least has around $500 billion of reserves to play with. Ukraine has virtually none.
Kiev said last week it was at serious risk of defaulting unless Western donors come up with more funds on top of the billions of dollars already promised. The IMF is in Kiev but won’t hand over the next tranche of a bailout package, worth $2.7 billion, until a budget for 2015 is ratified.

Ukrainian Prime Minister Arseny Yatseniuk speaks in Brussels today on the priorities of his new government.

Flash December PMI surveys for the euro zone, Germany and France will flesh out the fourth quarter economic picture, along with Germany’s ZEW survey, after activity in China’s factory sector contracted in December for the first time in seven months.

The Bundesbank has cut its 2014 growth forecast to 1.4 percent which, after a strong performance in the first quarter of the year, implies precious little growth in the last. The Bank of France has predicted 0.1 percent quarterly Q4 growth in its country. It’s all rather morose and the plunge in oil prices could soon push euro zone inflation into negative territory.

As European Central Bank chief economist Peter Praet said last week, one precondition for launching into quantitative easing, a weakening in the euro zone economy, has already been met. The remaining one is a view that the tools already in use are not having the required impact.

A decision on the ultimate policy leap could be taken in January although it might wait until March. The question is whether Mario Draghi can marshall his forces to agree on an unlimited programme or whether the likes of Bundesbank chief Jens Weidmann will succeed in limiting its scope.

The Bank of England has just announced results of its stress test of UK banks – judging how resilient Britain’s biggest eight lenders would be in the face of a slump in house prices and higher interest rates.

Lloyds and state-backed rival Royal Bank of Scotland only narrowly passed a health check by European regulators and were thought to be vulnerable. They have scraped through as the BoE passed all except Co-operative Bank.

After a surprise rate cut in Norway, Sweden’s central bank has a policy meeting. It cuts its key rate to zero in October and predicted no tightening until mid-2016. Analysts don’t expect any dramatic move this time.

The National Bank of Hungary will keep its record-low 2.1 percent base rate unchanged but some see a growing chance of more easing next year due to recent price falls.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see