The rouble is in free fall as the Russian central bank’s last-ditch rate hike has failed to stop a rout on the currency.
Russia’s central bank hiked its key interest rate from 10.5 per cent to 17 per cent at about 1am this morning – the largest single increase since the 1998 currency crisis and default – in a bid to halt the rouble’s recent fall in the value.
At 3.15pm, it had fallen 12.5 per cent for the day to 72 roubles to the dollar. It had got to as low as 78.
Oil has also continued its downward trend, with Brent Crude down 3.1 per cent to $59.20 and WTI off 2.3 per cent to $54.60.
When the central bank made its move last night the rouble had halved its value against the US dollar so far this year owing to trading sanctions and falling oil prices dragged the economy down.
Before the rate rise, a dollar bought 67 roubles. The move pushed the rouble’s value up to a peak of 58 to the dollar.
The RTS equity index is down 12.3 per cent for the day to 629.7.
Schroders Emerging Market Debt Relative strategy senior portfolio manager Alexander Moseley says Russia is in a “full-blown currency crisis” that only the central bank can fix.
The central bank will have to embark on “overwhelming” policy steps or the factors weighing on the rouble will have to finish before the crisis will be over, he explains.
“Our strategy has been to be underweight the rouble for most of this year, and we will continue with that strategy until one of three things happen: the central bank overwhelmingly moves to support the currency, oil stabilises, or sanctions are lifted. “
A ceasefire in Ukraine and the end of trade sanctions on Russia would be a start, however that is far from happening, he adds.
A stabilisation in the oil price is difficult to predict and there is not enough reward for the risk on offer, he says.
“It is difficult to see the underlying source of stress ending,” he says.
It is left to the central bank to restore confidence, he adds, and after its exceptional rate hike that leaves domestic capital controls and yet further rate tightening.
Russia’s foreign reserves are sufficient to repay its debt so it is extremely unlikely for it to default on its debt like in the last millennium, he adds. Especially as the public sector debt is equal to just 15 per cent of GDP.
“Even though the currency and economy are undergoing extreme stress … under sanctions and oil prices in the $40 to $50 range, we see Russia’s sovereign creditworthiness in the BB range from BBB currently,” Moseley says.
Hargreaves Lansdown senior analyst Laith Khalaf says it is impossible to foretell what will happen to the rouble from here.
“It’s certainly come a long way and it could have further to fall. The disturbing thing was how little effect the rate hike had on it.”