MOSCOW -- The Russian ruble came under intense selling pressure Tuesday, falling at one point by a catastrophic 20 per cent to a new historic low despite a massive pre-dawn interest rate hike from Russia's Central Bank. Russian officials were clearly rattled even though state television urged citizens not to panic.
"The situation is critical," Deputy Central Bank chairman Sergei Shvetsov was quoted by Russian news agencies as saying. "We could not have imagined what is happening in our worst dreams."
The Central Bank's surprise decision to raise the interest rate to 17 per cent from 10.5 per cent in the middle of the night Tuesday appeared to be a desperate attempt to prop up the troubled currency. The ruble has fallen sharply in recent weeks and is down more than 60 per cent since January, due to sinking oil prices as well as the impact of Western sanctions imposed over Russia's involvement in Ukraine's crisis.
The ruble's collapse has spurred ordinary Russians to rush out and buy imported products such as fridges and cars, since inflation is making those items more expensive daily. It is also likely to heap pressure on President Vladimir Putin, despite his wide popular support.
The ruble traded at 72 per dollar late Tuesday afternoon -- a modest improvement from earlier, when it hit 78.5 to the dollar.
Timothy Ash at London-based Standard Bank described the ruble's fall as "the most incredible currency collapse I think I have ever seen in the 17 years in the market, and 26 years covering Russia."
"There is now a huge credibility gap for Russian policy makers in the eyes of the market," he said, adding the decline is all the more astonishing given Russia's solid foreign currency reserves and the fact that it runs a budget surplus.
Oksana Dmitriyeva, deputy chief of the Fair Russia faction at the Russian Duma, blamed the collapse of the ruble on the Central Bank's "chaotic and unprofessional" policies. She said "the government has no strategy" and whether the ruble withstands the decline "depends on official policies."
The Central Bank's interest rate move Tuesday aimed to encourage currency traders to hold onto their rubles -- doing so gives them potentially big returns, certainly in comparison to many other currencies, such as the dollar, where the interest rate returns are near zero per cent.
The ruble's decline Tuesday was fueled by some opaque trading on Monday involving Rosneft, a company hard hit by Western sanctions that is run by Putin's close ally Igor Sechin.
Rosneft, Russia's largest oil company, raised 625 billion rubles ($10.9 billion at the time) in bonds Friday at yields below those on equivalent government securities. Central Bank approved the securities to serve as collateral in a Monday ruble auction, meaning bondholders will have access to Central Bank cash.
The disclosure of the bank's movement shook the markets Tuesday because it resembled direct support for a particular company.
Sechin has been pleading for a government bailout to refinance the debts of Rosneft, which was slapped with Western sanctions and has been cut off from Western debt markets.
The company, however, denied allegations that it was dumping rubles because of the economic situation, saying it was selling "exclusively for attracting financing for its projects in Russia." It pledged that "not a single ruble... will be used to buy foreign currency."
State television, meanwhile, insisted a weak ruble is actually good for the economy because it will stimulate domestic production and make exports cheaper.
Central Bank chairwoman Elvira Nabiullina said the rate hike should stem inflation -- higher borrowing costs effectively choke economic activity, dampening down price pressures. However, she conceded that the ruble's value will not be immediately influenced by the rate hike and added that it will take the ruble "some time" before it finds a fair value.
Other options available to the Russian authorities to stem the selling tide of rubles could be imposing capital controls or actual intervention in the markets -- buying rubles, for example. The Central Bank has intervened directly in the past few months.
Higher interest rates may eventually help the ruble, but it's likely to cause much hardship in an economy that's already heading for recession. Russian stocks were solid Tuesday, though, with the MICEX benchmark 2 per cent up late afternoon.
Neil Shearing, chief economist for emerging markets at London-based Capital Economics, said the Central Bank rate hike will cause "a further tightening of credit conditions for households and businesses and a deeper downturn in the real economy in 2015."
Given Russia's huge dependence on oil revenues, the recent sharp falls in the price of oil have hit the Russian economy hard. That's exacerbated by the fact that the Russian economy isn't diversified enough to withstand the shock.
The average price of a barrel of oil has dropped below $56 from a summer high of $107. The government recently downgraded its forecast for next year, predicting that the economy will sink into recession. Most international forecasters think the Russian economy is set to contract next year.
Alexei Kudrin, Russia's finance minister in 2000-2011, said on Twitter following the rate hike that "the fall of the ruble and the stock market is not just a reaction to low oil prices and the sanctions but also (a show of) distrust to economic policies of the government."
Kudrin added the rate hike "should be followed by government measures to raise investor confidence in the Russian economy." He did not say what steps he advocated.
