Russian ruble crisis continues despite central bank’s decision to raise interest rates to 17%

The Russian ruble went into free-fall in December 16 trading, falling repeatedly to hit record lows, despite the central bank’s dramatic decision to raise interest rates from 10.5% to 17%.

The rate rise was meant to strengthen the currency.

It helped it to 58 to the dollar early on Tuesday, but the dollar at one stage bought as many as 79 rubles.

The ruble has lost more than half its value against the dollar this year, hit by cheaper oil and Western sanctions.

Both of these have weakened the Russian economy.

Russia’s central bank has now pledged fresh further measures to try to stabilize its currency, with First Deputy Governor Sergei Shvetsov describing the situation as “critical”.

However, the Russian stock market was higher, with the main Micex index up 2% in afternoon trading.

Last week, Russia raised rates to 10.5% from 9.5%, a move that had little impact. The ruble’s slide this week was prompted by fears that the US was considering a fresh set of sanctions against the country for its support for separatists in Ukraine.

Russian oil giant Rosneft’s decision to issue 625 billion rubles ($9.9 billion) worth of bonds late last week at lower rates than Russian bonds has been blamed by some for exacerbating the currency’s decline.

However, Rosneft denied it was trying to dump rubles, saying “not a single ruble” would be used to buy foreign currency.

The chairwoman of the Russian central bank, Elvira Nabiullina, said the latest rate rise should curb inflation and encourage Russians to put more rubles into interest rate-bearing accounts.

However, she said she did not expect the ruble’s value to be immediately influenced by the rate rise.

“The ruble is currently undervalued according to all fundamental parameters and the state of the economy… and the current account,” she said.

“But for the ruble to return to its fundamental exchange rate it would take time.”

Russia’s central bank has previously tried unsuccessfully to stabilize the currency, buying rubles in the markets.

It has spent more than $70 billion supporting the ruble since the start of the year.

“This decision is aimed at limiting substantially increased rouble depreciation risks and inflation risks,” the central bank said in a statement.

Last week, the World Bank warned that Russia’s economy would shrink by at least 0.7% in 2015 if oil prices did not recover. It says an oil price of $70 a barrel would leave it with a fall of 1.5%.

Raising interest rates has its own risks, as more expensive borrowing can itself slow growth. But it may also stem the tide of money leaving the country.

[youtube 0LkRTkUQqPU 650]