In a swift and unexpected move, Russia’s central bank has opted to raise interest rates by 3.5 percentage points. This emergency measure is strategically aimed at curbing the recent weakening of the rouble, which had plummeted to its lowest point in nearly 17 months.
This decision to elevate the key rate from 8.5% to 12% was unveiled after an extraordinary session of the bank’s board of directors. The urgency was prompted by the rouble’s alarming descent below the significant psychological threshold of 100 to the dollar on a Monday morning.
The central bank articulated that this decision was undertaken to “mitigate risks to price stability.” This move follows a period during which various inflation indicators surged to levels surpassing 7% within the past three months, a significant departure from the bank’s established target of 4%.
Market analysts noted that the impact of this decision appeared to “underwhelm” market sentiment, resulting in a further devaluation of the currency on Tuesday morning. This development has led experts to sound a cautionary note, suggesting that achieving financial stability while western economic sanctions against Russia remain in force could be a challenging endeavor.
Susannah Streeter, Head of Money Markets at Hargreaves Lansdown, pointed out the ongoing economic consequences of the Ukraine conflict, asserting that the current economic fallout is inextricably linked to the conflict’s relentless grip, the persistent impact of sanctions, and the increasing demand for military expenditures.
In the midst of this economic scenario, discussions have emerged regarding the potential reinstatement of capital controls as a means to prop up the diminishing ruble. However, reports indicated that no definitive decision had been reached on this matter.
This year, the rouble has experienced a notable 26% depreciation against the dollar. This decline stems from a combination of factors, including a decline in export earnings and amplified military expenditures. Consequently, the rouble stands as the third-worst performing global currency in 2023.
Key figures within the Kremlin have voiced the necessity of higher borrowing costs in response to the currency’s decline. Notably, Maxim Oreshkin, Senior Economic Adviser to President Vladimir Putin, attributed the rouble’s fragility to a “loose monetary policy.”
While the rouble briefly rallied following the announcement of the central bank’s meeting, gaining over 2% and briefly reaching approximately 98.5 against the US dollar, the rate hike announcement caused gains to recede below 98 on Tuesday morning, as evidenced by Moscow exchange data.
Timothy Ash, a strategist at Bluebay Asset Management, highlighted the complexity of the situation, emphasizing that the ongoing conflict is a core impediment to Russia’s economic stability. He contended that raising policy rates, though potentially slowing the pace of rouble depreciation, would not address the root issues unless the war and accompanying sanctions are effectively resolved.
The rouble’s journey has been marked by volatility since Russia’s incursion into Ukraine in February 2022. A stark drop to a record low against the dollar was followed by a rebound, facilitated by stringent capital controls that restricted the outward flow of funds from the country.
As the war effort persisted, the central bank initially raised interest rates to 20% to shield the economy from sanctions-induced shocks. Subsequent actions saw a gradual reduction to 8.5% in an attempt to stimulate economic growth.
In the grand tapestry of events, the rouble’s trajectory underscores the complex interplay between global dynamics, geopolitical tensions, and economic fundamentals. With Russia’s economic landscape perpetually intertwined with the ongoing conflict, the journey ahead remains fraught with challenges and uncertainties.