As Ruble Plunges, Russia's Central Bank To Hold Emergency Interest Rate Meeting

tendata blogTrade Trends News

ten data blog15-08-2023

- Russia's central bank will hold an extraordinary meeting on Tuesday to discuss the level of key interest rates as the ruble's sharp depreciation triggers calls for higher borrowing costs, the bank said on Monday.

- An economic adviser to Russian President Vladimir Putin rebuked Russia's central bank on Monday as the ruble fell below $101 against the dollar, blaming the Russian monetary authorities for loose monetary policy in a sign of growing discord among the country's monetary authorities.

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The ruble, which had tumbled Monday night, reversed its trend and rose to a strong 100 against the dollar after the Central Bank of Russia announced a special policy meeting on Tuesday, sparking expectations of another sharp interest rate hike.

Economic advisers to Russian President Vladimir Putin had earlier rebuked the central bank when the ruble fell below 101, accusing it of easing in a sign of growing discord between the authorities.

The ruble has lost about a quarter of its value against the dollar since Putin sent troops to Ukraine in February 2022, as Western sanctions weigh on Russia's trade balance and military spending soars.

The ruble fell to 101.75 on the Moscow bourse on Monday, its lowest level in nearly 17 months and down 30 percent so far this year.

The index had recovered all of its intraday losses and was up 1.8 percent on the day to 97.62 points by 1534 GMT.

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Putin's economic adviser Maxim Oreshkin said earlier that the central bank could ensure that the pace of lending was reduced to sustainable levels by raising interest rates.

High consumer lending, combined with severe labor shortages and a wide-ranging budget deficit, have fueled inflation this year.

"The main source of the ruble's depreciation and accelerating inflation is soft money policy," Oreshkin wrote in a TASS op-ed. "The central bank has all the tools it needs to normalize the situation in the near future."

The next interest rate decision by the Bank of Russia is due on September 15th. The central bank declined to comment when asked earlier about the possibility of an emergency rate hike from the current 8.5 percent.

Promsvyazbank analyst Denis Popov said another key rate hike is on the horizon, following the central bank's 100 basis point hike on July 21st.

"The ruble should become more expensive to limit demand, including imports," Popov said. The bank may also seek to limit excess ruble liquidity and even tighten rules on cross-border capital flows, he said.

The central bank has blamed the ruble's depreciation on Russia's shrinking current-account surplus - which fell 85 percent year-on-year between January and July. On Monday, the bank said the ruble's depreciation does not pose a financial stability risk, but an interest rate hike is soon likely.

Higher rates would make life tougher for borrowers, including companies and governments that finance military operations in Ukraine.

Matt Vogel of FIM Partners said, "The Russians have always had a hard currency portfolio and a ruble portfolio." He added that there would be more incentive to convert rubles to dollars or other currencies if there was no effort to support the currency.

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The ruble has endured a period of turmoil since Russia's invasion of Ukraine in February 2022, falling to a record low of 150 to the dollar two weeks after the war began, then recovering sharply after Russia's central bank imposed strict capital controls to limit the flow of money out of the country.

By last summer, the ruble had rebounded to a seven-year high, in part because the invasion led to higher oil and gas prices that helped Russia increase export revenues while consumer imports fell.

Also Read: 

  1. How Much Oil Does Russia Export?

  2. How Much Gas Does Russia Export?

Since the West imposed price caps and embargoes, Russian oil revenues have plummeted while imports have recovered. The government has spent billions of dollars on the defense industry to continue the war in Ukraine, and many key supplies still come from abroad.

Also Read: Russian Oil Exports Return to Pre-War Levels

The ruble's depreciation accelerated after the failed June uprising by Yevgeny Prigozhin and his group of Wagnerian mercenaries led Russians to transfer money into foreign accounts.

Dr. Janis Krueger, a researcher focusing on the Russian economy at the German Institute for International and Security Affairs, a think tank, said, "The Russian ruble is still searching for the right exchange rate for long-term war sanctions. Without capital controls, speculators would have digested last year's poor outlook."

Last week, Russia's central bank took steps to stabilize the ruble by suspending purchases of foreign currencies until 2024 "to reduce volatility." But the move did not immediately stop the currency from depreciating, raising concerns among Russian policymakers that consumer prices could rise sharply.

In the short term, a devaluation of the ruble could help the authorities finance their massive war spending. Russia sells oil in foreign currencies and the current exchange rate will buy more rubles at home. Moscow doubled its 2023 defense spending target to more than $100 billion (79 billion pounds), a third of all public spending, a government document reviewed by Reuters this month showed.

But the ruble's devaluation could evoke memories in Moscow of the currency's heavy losses during Russia's financial crisis in 1998 and has already sparked rare public criticism of Russia's central bank.

Influential TV host Vladimir Solovyov said last week, "The damn central bank hasn't even explained why the ruble's exchange rate has soared so high that they're laughing at us abroad because our ruble is one of the three weakest currencies.

"What the hell is going on in this country! Where did this exchange rate come from? Eventually, this will lead to higher consumer prices and will coincide with the election campaign," Solovyov added, referring to Russia's presidential election scheduled for March 2024.

The Kremlin touted Russia's economic prospects, while Russia's central bank predicted the economy would grow by 2.5 percent this year despite heavy Western sanctions.

Despite the ruble's weakness, Russia's statistics agency Rosstat announced last week that the economy grew by 4.9 percent year-on-year in the second quarter of 2023, the first growth in 12 months.

Experts say the economic recovery has been largely artificially driven by government spending on the war, and that the likelihood of a slowdown increases if the conflict stops.

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Other Trade Data References to The Impact Of The Depreciation Of The Ruble:

1. Ruble Plunge: The Russian Market Anew for Importers

2. Ruble Plunge: What Does It Mean for Russia Importers and Exporters?

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