The Russian rouble plunges further as it hits new lows, despite an emergency hike in interest rates to 17 per cent. As Russia’s economy appears to be heading for free-fall, should we care?
Traders ditched the currency as the central bank move failed to stem fears over the plunging price of oil – now at a five and a half year low – and western sanctions.
The surprise rate hike from 10.5 per cent in the early hours of the morning initially helped the rouble to recover losses in the previous session but it was later on the slide again, weakening to near 80 roubles against the US dollar.
The prospect of tightening US sanctions over the conflict with Ukraine also weighed on the currency, coming on the back of the Russian government’s recent downgrade of its forecast for next year, predicting the economy will fall into recession.
Market analyst Craig Erlam said: “The Russian rouble is in freefall despite efforts made overnight from the Central Bank of Russia to at least slow the decline.”
Central Bank Chairwoman Elvira Nabiullina said the sharp interest rate hike should stem inflation but conceded that it could be “some time” before the rouble finds a fair value.
The Russian rouble is in freefall despite efforts made overnight from the Central Bank of Russia. Market analyst Craig Erlam
There was speculation about whether the Kremlin would need to impose capital controls to stop money flowing out of the country if the interest rate move failed to arrest the decline.
Head of Economic Research at Open Europe, Raoul Ruparel, told Channel 4 News: “The primary economic effect will be that the significant energy imports which Europe makes from Russia will become cheaper as the euro is stronger against the rouble.
“It remains to be seen whether there will be any political knock-on effect or whether the problems in Russia’s economy will force a change in Putin’s approach.”
Meanwhile the hike looked likely to cause major hardship in Russia’s economy, with pressure on borrowers.
In London, however, Bank of England Governor Mark Carney appeared to play down the impact of the crisis on the UK during a press conference.
He said Russia accounted for 1.3 per cent of exports last year before sanctions started to bite, while British-owned banks account for 2.6 per cent of Russia’s total bank equity.
Sterling looked to be a beneficiary of the switch out of the rouble, together with the euro, with both climbing by a cent against the US dollar.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said international investors would be reminded of the previous Russian currency crisis in 1998 and subsequent default on its debts that had a major knock-on effect on Wall Street.
But he added: “While the currency has significantly weakened this year, default by the government looks unlikely this time around because Russia has relatively low levels of government debt compared to GDP.”
What about the Russian oligarchs?
The dramatic fall of Russia's rouble on Tuesday could see oligarchs move more cash out of Russia and into London, an economic analyst tells Channel 4 News.
Head of Economic Research at Open Europe Raoul Ruparel said: "Either they [the oligarchs] will try to move money out of Russia even faster or they could be caught by capital controls, if and when they do arrive.
"In one sense the increasing capital flight could see more money flowing to London. However, if capital controls are imposed this could then slow down significantly (it may continue to an extent since people often find ways around them).
"Ultimately, London is actually much less exposed to Russia than is often made out. Other countries in Europe – notably Germany and eastern Europe – will see bigger impacts from these ructions.