Russia takes new measures to shore up sagging rouble

Economists criticise efforts and urge central bank to use vast foreign reserves

Ben Chu
Wednesday 17 December 2014 19:36 GMT
The dramatic fall in Russia's rouble slowed with the government selling foreign currency to prop it up
The dramatic fall in Russia's rouble slowed with the government selling foreign currency to prop it up (Reuters)

Russia’s currency crisis has descended into farce after the country’s leaders were accused of raiding the back of the couch for “small change” to shore up the rouble’s value.

The finance ministry announced it was selling $7bn (£4.5bn) of its own foreign exchange stockpile to help support the currency, which has halved in value against the dollar since the summer.

But economists were scathing about the move, arguing the $7bn is too small to make any real difference and pointing out Russia’s central bank is sitting on a foreign exchange war chest worth hundreds of billions of dollars, which could be deployed to help the country out of its gravest economic crisis since 1998.

“Why, if the central bank has $413bn in reserves, is the ministry of finance being called on to put its hand in its pocket for some small change?” asked Tim Ash of Standard Bank. “They are checking the back of the sofas.”

Simon Derrick, an analyst at Bank of New York Mellon, said $7bn was “not significant” in currency terms.

The value of the Russian currency gyrated again during the course of yesterday, sliding to 72 roubles to the dollar in early trading, before strengthening to 61.

Analysts said that sudden improvement suggested the Russian authorities were twisting the arms of exporters to sell their holdings of foreign currencies, thus supporting the rouble.

The crisis has become a serious challenge to the authority of President Vladimir Putin, whose domestic popularity is founded on his record of delivering relative economic stability to Russia in recent years. Mr Putin is due to hold his annual end of year news conference tomorrow, where he is likely to be grilled by the public over the rouble’s collapse.

Growth is collapsing in the Russian economy and inflation is approaching 10 per cent. There were reports yesterday of Russians heading to shops to spend before prices shoot up. Apple announced earlier this week that it has halted sales in Russia due to “extreme” fluctuations in the rouble-dollar exchange rate.

The central bank raised interest rates to 17 per cent on Monday night, up from 10.5 per cent previously, but this was not enough to stop the rouble haemorrhaging yet more value against the dollar.

Official alarm at the slide was underlined by the Russian Prime Minister Dmitry Medvedev yesterday who said the currency’s value had become “detached from fundamentals”.

Speaking at an emergency meeting of Russian ministers and industrialists, Mr Medvedev reiterated that the Kremlin has no plans to introduce capital controls in order to prevent money leaving the country. “That does not help anyone” he said. “Our future actions should be based on market mechanisms.”

But analysts stressed that more official interventions would be needed to stabilise the currency. “We believe that further rate hikes, in combination with large-scale foreign‑exchange interventions, will likely be delivered soon,” Fredrik Skoglund, of SEB bank, said.

“The window of time for which direct intervention would be effective in staunching the rouble bloodbath is quickly running out, beyond which the next set of measures to be contemplated would likely be capital controls,” Phoenix Kalen, of Societe Generale, said.

The rouble has been tumbling in tandem with the global oil price, reflecting the country’s heavy reliance on energy exports. The economy has also been hit hard by Western sanctions imposed over the Kremlin’s support for Ukrainian separatists. Large Russian companies that borrowed money in dollars are facing major refinancing problems because of the rouble’s collapse.

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