The Russian ruble continued its slide on Tuesday, off more than 20 per cent despite a desperate move by the country's central bank to hike its benchmark interest rate to 17 per cent.
The Russian central bank surprised the world when it raised the rate to 17 per cent from 10.5 per cent. That was an attempt to stem the tide in the nation's currency, which has declined to record lows amid a plunging oil price and tough international sanctions on the economy because of Putin's incursions into Crimea.
More than a quarter of Russia's GDP comes from the energy sector, a dangerous dependency in a world where oil prices are off by almost 50 per cent in a matter of months.
The Russian rate hike is the biggest the bank has tried since 1998, the year when Russia defaulted on its sovereign bonds and a little before the country revalued its old ruble by 1,000 to one.
Central Bank chairwoman Elvira Nabiullina said in televised comments on Tuesday that the decision should stem inflation and encourage Russians to open ruble-denominated deposits.
The move was meant to make it expensive for currency traders to buy rubles and sell them on the market. (If you can get 17 per cent on your money for doing nothing more than buying rubles and holding them, that's an incentive to invest in the currency and stop shorting it.)
Russian Central Bank governor Elvira Nabiullina, pictured here in June 2013, said Tuesday it will "some time" before the ruble finds a fair value in the wake of the bank's surprise large overnight rate hike. (Yekaterina Shtukina, Government Press Service, RIA Novosti/Associated Press)
But it didn't work. The ruble was trading at 72 per U.S. dollar late Tuesday afternoon. That's a modest improvement on where it was trading earlier — it hit 78.5 to the dollar. But still off more than 60 per cent since the summer.
Nabiullina conceded that the ruble's value will not be immediately influenced by the rate hike and said it will take the ruble "some time" before it finds a fair value.
"With these steps, the Central Bank is looking to bring stability back to the (foreign exchange) market, which has been behaving irrationally over the last few weeks," Moscow-based investment bank Sberbank-CIB said in a morning note. "This state of affairs required extraordinary measures from the Central Bank — and such measures have now been taken."
Neil Shearing, a chief economist for emerging markets at London-based Capital Economics, said in a note on Tuesday that the hike does not eliminate the risks to the currency such as the prices of oil and will cause "a further tightening of credit conditions for households and businesses and a deeper downturn in the real economy in 2015."
Demand for durable goods, an overwhelming majority of which is imported, shot up in the past months as major retailers have announced upcoming price hikes. Major automotive dealers, for one, are reporting sales up 15 to 30 per cent in November, according to RIA Novosti news agency.
Russian stocks were moderately declining Tuesday morning with the MICEX benchmark 1.5 per cent lower, reflecting the rate hike's pressure on businesses.
The price of foreign made goods in Russia have skyrocketed in recent months as ordinary Russians have flocked to find other ways of storing wealth that aren't the ruble.
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