[ 2014-12-16 ]

Moscow lifts interest rate to 17%
London (UK) – 16 Dec 2014 – FT - Russia’s
Central Bank has raised its main interest rate
from 10.5 per cent to 17 per cent in the middle of
the Moscow night, just five days after the last
rate rise and hours after the rouble suffered its
worst drop since 1998.

“The decision was driven by the need to limit
the risks of devaluation and inflation, which have
recently significantly increased,” the central
bank said in a statement.

Its move followed a day during which the rouble
had tumbled more than 10 per cent against the
dollar as the implications of the fall in oil
prices for the country’s energy-dependent
economy triggered a rout across Russian markets.

In the bleakest official forecast yet from Moscow,
the Russian central bank warned that the country
could see a 4.5 per cent to 4.7 per cent
contraction in GDP next year if oil prices
remained at $60 a barrel.

Along with the rate rise the bank also announced
it would expand its foreign currency repo auctions
from $1.5bn to $5bn, in an attempt to provide
liquidity to the country’s banks, which have
been struggling with a shortage of dollars.

Currency traders and analysts in New York
described the central bank’s move as a
“last-ditch” effort to stop the rouble’s
relentless slide.

“It’s a shock-and-awe approach that has worked
in the past with other emerging markets’ central
banks, trying to defend their currency and shake
short-term speculators out of markets,” said
Kathy Lien of BK Asset Management, which
specialises in currencies.

“Basically the Russian central bank is telling
markets that it is on the other side of this trade
and won’t let the rouble completely collapse.
They have tried a lot of measures recently and
none seemed to have worked. The rate rise should,
at least in the short term, help the rouble find a
bottom,” she said.

Aggressive rate rises are not uncommon in emerging
markets when central banks have to defend their
currencies from rapid depreciation. Earlier this
year Turkey pushed up its key interest rate from
7.75 per cent to 12 per cent on overnight loans.
Brazil’s raised its prime-lending rate to 45 per
cent in March 1999 after the real weakened by 40
per cent.

The combination of a sharp drop in the price of
oil, western sanctions and paralysing uncertainty
over the economic outlook have triggered a
collapse in the rouble in the past month. It hit
fresh lows of 64.45 against the dollar and 81.35
to the euro on Monday.

So far this year, it has lost half its value
against the dollar, making it the world’s
worst-performing major currency, ahead of the
Ukrainian hryvnia.

Traders said the central bank had intervened
several times during Monday trading but had failed
to halt the slide in the rouble for more than a
few minutes on each occasion.

“There is panic in local markets driven by the
inaction of the central bank,” said Benoit Anne,
head of emerging markets at Société Générale,
earlier in the day. “Russia may not be on the
brink of financial crisis but it is close to
losing its investment-grade status.”

The sell-off swept across asset classes, with the
shares of Sberbank, Russia’s largest bank,
dropping 6.3 per cent, and Rosneft, the state oil
company, falling 4.4 per cent. In dollar terms,
Russia’s Micex equity benchmark has fallen more
than 26 per cent so far in December — on track
to be the biggest monthly drop since October
2008.

In bond markets, the yield of the government’s
international dollar-denominated bond leapt up
more than half a percentage point to 7.22 per cent
— above the equivalent yields for Rwanda, the
Ivory Coast and Peru.



Dubbing it “Red Monday”, Timothy Ash, emerging
markets strategist at Standard Bank in London,
said the rout was a demonstration of investors’
lack of confidence in the Russian economy. “It
is not just about oil, it is about sanctions,
geopolitical risk
and . . . the lack of
policy action by the Russian authorities,” he
said.

In Moscow, the currency collapse evoked memories
of the economic turmoil of the 1990s, as a few
Russian shopkeepers gave up trying to keep pace
with the falls in the rouble and returned to the
practice of marking prices in “conditional
units” — a code for dollars.

They were swiftly brought into line. Alexei
Nemeryuk, head of trade and services at the Moscow
mayor’s office, told news agency Interfax on
Monday that marking prices in anything other than
roubles was illegal. “Apparently, retailers are
too lazy to rewrite their price tags. But this is
a few isolated cases,” he said.

The central bank on Monday forecast that capital
outflow from Russia would total $120bn in 2015,
nearly matching the $134bn estimated to leave the
country this year. It also predicted outflows of
$75bn in 2016 and $55bn in 2017.

Russian companies remain largely shut out of
global capital markets as a result of sanctions
imposed by western countries and face a looming
credit crunch as they need to refinance their
debt. Rosneft, for example, last week raised
Rbs625bn from local banks ahead of a foreign bond
payment due at the end of the week.

Data from JPMorgan shows that, on average,
Russia’s hard-currency corporate bond yields
have increased from 8 per cent at the start of the
month to about 11 per cent.

“The situation in Ukraine and resulting
sanctions have led investors to question how
exactly Russian corporates will be able to
refinance their debts without access to their
usual investor base,” said Yannik Zufferey, head
of the Swiss fixed-income team at Lombard Odier
Investment Managers.

Source - FT

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