MOSCOW – The Russian ruble came under intense selling pressure Tuesday, falling at one point by a catastrophic 20 percent to a historic low despite a massive predawn 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 percent from 10.5 percent 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 percent 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 refrigerators 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 policymakers 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 percent.
What market watchers said appears to be a behind-the-scenes deal for state oil company Rosneft helped undermine the ruble.
The company, run by Putin’s longtime confidant, Igor Sechin, had been clamoring for months for a government bailout because sanctions limit its ability to borrow abroad.
On Friday, it borrowed 625 billion rubles, worth $10.9 billion at the time, by selling bonds at low interest rates – to what analysts said were state-owned banks.
Rosneft denied exchanging any of the bond proceeds for dollars, but analysts said word of the deal appears to have helped send the ruble spiraling downward.
Evgeny Solovyov, an analyst at Societe General in London, said while Rosneft remains profitable at lower oil prices, it has hefty obligations including $14 billion in debt due this month and in February.
Rosneft is so important that “it’s hard to imagine Russia would let Rosneft default. And we have just seen that they won’t,” Solovyov said.
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