Rouble crashes to dramatic low amid frantic central bank rate rise
Russians left wondering whether the good times under Vladimir Putin are over as 17% interest rates fail to save the day
- The Guardian, Tuesday 16 December 2014 18.31 GMT
Russians are wondering whether the relative economic stability of Vladimir Putin’s rule has come to an end, as the rouble continued its downward spiral on Tuesday, despite a dramatic overnight rise in interest rates.
“Even in our nightmares we couldn’t have imagined what is happening now a year ago,” said the deputy chairman of Russia’s central bank, Sergei Shvetsov, as the currency slid further against the dollar and euro.
Analysts suggest a combination of falling oil prices and western sanctions over Russia’s actions in Ukraine initiated the rouble’s collapse, while further decline is taking place as investors panic and lose confidence in the currency.
On Tuesday the White House ratcheted up economic pressure against Russia, indicating it would sign into a law a bill passed by Congress to expand sanctions and provide further financial aid to Ukraine.
Obama spokesman Josh Earnest said it regarded the legislation, which was recently passed via voice vote by only a handful of congressmen in the House and Senate, as primarily about “preserving flexibility” for further sanctions rather than triggering immediate increases to earlier moves.
But there was evident delight in Washington at Russia’s economic troubles, which the administration believes is partly due to existing financial pressure and claims Moscow brought it upon itself by defying international opposition to its intervention in Ukraine.
As ordinary Russians watched their savings lose more real value on Tuesday, an unusually bitter polemic broke out between senior government officials. In a system where public disagreement is rare, the outbursts were a sign of how serious the tension is, as officials scrambled to deflect blame from themselves for the rouble’s slump.
The central bank announced a rise in interest rates from 10.5% to 17% after a late-night meeting behind closed doors on Monday in a desperate attempt to stop the slump. After a brief rally on Tuesday morning in response to the move, the rouble continued its fall and has now lost more than 50% of its value against the dollar since the start of the year. The rouble rallied again in the afternoon, recovering from a low point of over 100 to the euro to reach the 90 mark, but that figure still leaves Russians stunned, given the rate at the beginning of this year.
Shvetsov said raising the interest rates had been “a choice between really bad and really, really bad”, describing the situation in the economy as “critical” and reminiscent of the 2008 financial crisis.
That analysis was echoed in Washington, where Jason Furman, chairman of Obama’s Council of Economic Advisers, said: “I would be extremely concerned if I were president Putin’s economic adviser. They are between a rock and a hard place.”
Putin said in his state of the nation address earlier this month that Russians should take advantage of sanctions and the falling rouble to develop domestic industry. However, during the oil windfall years, little of the infrastructure required for entrepreneurship and small businesses to flourish has been set up, with corruption and red tape still major issues. Many said that the increased interest rates would make it even harder for small businesses and potential domestic producers to function, due to the expense of taking out credit.
MP Oksana Dmitriyeva, who sits on the Russian parliament’s budgetary and tax committee, was scathing about the rate rise: “What the central bank is doing now is not just a mistake, it’s not just financial illiteracy, it’s not even just unprofessionalism. Its actions are close to schizophrenia, to madness, to complete incompetence.”
Others said the bank was left with little choice, and suggested other branches of the government could be to blame.
“The central bank’s decision to raise the rate to 17% was forced on them by the current climate and is the right one,” wrote Alexei Kudrin, who was finance minister until 2011, on Twitter. “The fall of the rouble and the stock market is not just a reaction to the low price of oil and to sanctions, but also due to a lack of confidence in the government’s economic policy.”
Kudrin specifically criticised Rosneft, the state-controlled oil giant, for a huge bond issue last week that many have suggested could have contributed to the rouble’s fall.
Rosneft’s spokesperson Mikhail Leontiev hit back, saying the central bank itself had been responsible for “pushing Russia towards recession”, and compared the interest rate rise to shooting dead someone who has a small cut to the finger, in order to alleviate the pain.
Rosneft’s head Igor Sechin, who is close to Putin and is often seen as the leading figure among Kremlin hawks, went even further, insisting the company had not done anything wrong, and using Stalinist language to denounce Kudrin.
“We must deal with intrigue-mongers and provocateurs. We must find out who these people are, these Navalnys, Nemtsovs and Kudrins, and whose interests they are pursuing,” said Sechin, lumping in Kudrin with Alexei Navalny, the anti-corruption campaigner and opposition politician who is currently under house arrest, and Boris Nemtsov, another long-standing opposition politician.
The fall in the rouble continues to affect ordinary Russians. With a large share of food and consumer goods imported, purchasing power has been severely affected by the large drop in the currency. Russia enjoyed years of growth under Vladimir Putin’s presidency. As the economy benefited from high oil prices an increasing numbers of Russians have grown used to a higher quality of life, imported products and foreign travel, which makes the sudden reverse of fortunes come as a shock. The giant state-run energy company Gazprom, which employs nearly half a million people, denied a report by Interfax news agency that it is due to cut one quarter of all staff.
There were no obvious signs of panic in Moscow, where people have been slowly coming to terms with the falling rouble all year, but at certain shops people were rushing to buy up stock imported before the currency fell, and still being sold off at old prices.
The question on everyone’s mind was just how much further the slump could go. Most analysts had insisted that, while sanctions and oil prices had an obvious effect on the currency, Russia’s sizeable foreign currency reserves and other fundamentals meant it was in a reasonable position to weather the storm. Instead, the currency has plummeted further than anyone predicted.
“Beyond questions about the fundamentals, this is now about animal spirits,” said Russia analyst Sam Greene. “This is people’s emotions guiding their investment and financial behaviour.”