New Delhi: The Russian central bank raised interest rates to 17 per cent in an attempt to prevent the rouble's collapse. However, the dramatic move has failed to halt the decline, leaving President Vladimir Putin facing a full-blown currency crisis.
Russia is in a pretty bad situation. With a clapped-out manufacturing sector, it is too dependent on its massive stocks of oil and gas at a time when the price of oil is witnessing a huge fall. Adding to its trouble are the sanctions over Russia's support for the separatists in Ukraine.
The ruble fell a jaw-dropping 11 per cent against the dollar on Monday. The event looks straight out of the Financial Crisis Handbook – completely unsustainable. The currency's collapse has evoked the turmoil of the 1998 Russian crisis, an event that reverberated through financial markets around the world.
The dramatic collapse in the rouble has not triggered outright panic, but it is promoting Russian people to stock up on durable goods such as furniture, cars and jewellery before they become even more expensive and going after currency exchange. Bankers say the reaction by ordinary Russians has further increased the pressure on rouble, thus eroding the confidence in the currency.
The collapse in the value of the ruble will also have serious implications for Russians who have debts denominated in foreign currencies. Much higher interest rates will also be devastating to the fortunes of Russians who need to roll over ruble-denominated loans.
The move to hike interest rates would also severely impact the country's construction industry.
The Russian central bank now estimates that the economy will shrink 4.5 per cent next year if oil stays at $60/barrel, and that is something that would certainly trigger a wave of corporate defaults. So far this year, Russia has spent $80 billion of its foreign-exchange reserves in an unsuccessful attempt to prop up the ruble.
For the Russian economy, the currency crisis means a deeper recession going on to the next year. For businesses, it means more uncertainty and less access to funding. For now it looks like Russia's central bank needs to keep trying, either by raising rates again or potentially by cracking down on the flow of capital out of the country.
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