Russia Increases Interest Rates

The Russian Rouble has been under pressure this year, falling from 32.61 against the Dollar in December 2013 to hit a record low of 79 yesterday before rallying somewhat to trade at 69.24 at the time of writing. The major factors underlying this strong decline are the twin problems of the collapse of the world’s crude oil price and the effects of sanctions arising from Russia’s perceived interference in the sovereign affairs of neighbouring Ukraine.

The Russian central bank has tried to support the value of the Rouble by spending in excess of $70 billion so far this year purchasing its own currency, but to little avail. The bank also pushed interest rates up last week by 1% to 10.5%, but the move did nothing to arrest the Rouble’s slide. Russian inflation is running at about 9%, so in usual circumstances the move should at least held back the tide somewhat. Investors seemed to think that the move was too little too late. So just yesterday, the bank increased its interest rate by a whopping 6.5% to stand at 17% - many major banks still have rates at historic low levels of between zero and 0.5%, it should be recalled.

However, the hike in Russia’s interest rate did not shore up the Rouble, at least initially. It opened at about 65 to the Dollar, but fell to a new low of 79 after the rate hike before recovering ground later, improving to 64.3 and then falling back to its current value of 68.6 i.e. lower than before the rate increase was announced.

The strength of the Rouble has mirrored the crude oil price which is unsurprising as Russia is reliant on petrochemical exports for much of its foreign export earnings. Since oil and gas are priced in Dollars, Russia is partly shielded from the decline since the Dollar has strengthened significantly against the Rouble, but the cost of imports to Russia will be causing pain. In order to balance its budget (from oil and gas sales) Russia wants to see an oil price of $105 per barrel – Brent crude is currently trading at $59.5. Most analysts are expecting oil prices to remain subdued for some time since Opec will not act to cut production, oil stocks are currently high and global demand remains weak.

Dr. Mike Campbell
Dr. Mike Campbell is a British scientist and freelance writer. Mike got his doctorate in Ghent, Belgium and has worked in Belgium, France, Monaco and Austria since leaving the UK. As a writer, he specialises in business, science, medicine and environmental subjects.