- The Washington Times - Monday, December 15, 2014

Acting at an unannounced meeting after the markets had closed, Russia’s central bank Monday sharply raised a key interest rate to fight currency speculators and prevent a further collapse in the value of the ruble.

Battered by falling oil prices and the prospect of new U.S. sanctions over the standoff in Ukraine, the ruble had lost nearly half its value relative to the dollar this year before the central bank’s surprise move Monday night, which instantly hiked the benchmark Russian interest rate from 10.5 percent to 17 percent.

By contrast, the U.S. prime lending rate is currently 3.25 percent; at the beginning of the year, Russia’s benchmark interest rate was 5.25 percent.

The ruble’s collapse, the most spectacular attack on the country’s currency since the financial crisis of 1998, presents a political hazard for Russian President Vladimir Putin. The 1998 crisis, in which the savings of many ordinary Russians were virtually wiped out, helped undermine popular support for then-President Boris Yeltsin, Mr. Putin’s political patron.

The U.S. Congress added to the pressure on both the ruble and Mr. Putin with the passage over the weekend of a new round of sanctions targeting state-owned Russian energy and defense companies.

The “Ukraine Freedom Support Act,” the latest U.S. move to punish Moscow for its incursions into its neighbor, enjoyed strong bipartisan support, but the White House has not said whether President Obama will sign it.

“This is something that has been the source of some discussions at the White House over the last several days,” spokesman Josh Earnest told reporters aboard Air Force One, saying Mr. Obama wants to make sure the sanctions are effective while limiting the impact on U.S. businesses, international oil markets and the global economy.

Analysts said the sharp interest rate hike was intended to deliver a shock to the currency markets and scare off speculators who have placed heavy bets on the ruble’s continued decline. The Putin government has already raised interest rates six times this year and spent an estimated $80 billion or more from its foreign currency reserves in a so-far futile bid to preserve the ruble’s value.

The collapse of world oil prices has been a disaster for the energy-based Russian economy, with a global supply glut and weak demand pushing the price of a barrel of oil from $107 this summer to below $60 last week. Even with a slight rebound in oil prices Monday, the ruble kept falling.

“The problem is that there is no obvious ‘endgame’ for investors to grab hold of when it comes to a possible turnaround,” wrote Tom Levinson, currency strategist at Moscow-based Sberbank CIB, in a note to investors Monday before the central bank acted. “Markets are pushing at an open door.”

Russia’s government gets half of its budget revenue from the country’s vast oil and natural gas reserves. The central bank, in a new analysis, said the economy could shrink up to 4.7 percent in 2015 if oil prices stay under $60 a barrel.

Traders said the sharp hike in interest rates could be enough to arrest the ruble’s losses for now but at a significant cost to the economy as a whole. Short-term futures trading in the ruble rallied after the rate increase was announced.

“The central bank is trying to stop the avalanche, and such a massive hike may be sufficient,” Slava Breusov, a currency analyst at New York-based Alliance Bernstein LP, told the Bloomberg news service. “No one seems to be thinking what it will do to the economy, as the priority is to stop the ruble plunge.”

The ruble rout has been stunning in its scope and swiftness.

The Russian currency was trading at 32.9 rubles to the dollar a year ago; on Monday, the ratio was 63.9 rubles to the dollar. The 49.3 percent decline in the ruble this year made it the world’s worst-performing currency relative to the dollar, surpassing, ironically, the battered Ukrainian hryvna.

The ruble lost 14 percent of its value just in the 24 hours before the central bank acted.

The currency decline means that imported goods will be more expensive for Russian consumers, while the lending rates for home mortgages and business loans will shoot up.

The rate increase “is a way of buying time,” Barry Eichengreen, an economist at the University of California, Berkeley, told The Associated Press. “It doesn’t solve any of the underlying issues that the Russian economy has.”

Mr. Putin, in a defiant Dec. 4 state-of-the-nation speech, lashed out at currency “speculators” and hinted he may soon side with hard-liners in the government urging the more drastic step of outright controls to stop the outflow of foreign currency.

“We have asked the central bank to take measures to make sure that speculators can no longer take advantage,” Mr. Putin said. “We know who those people are, and we have the means to rein them in. It’s time to use these instruments.”

This article was based in part on wire service reports.


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