A late-night unveiling of an emergency interest rate increase to 17 percent has failed to stop the Russian ruble from plummeting into freefall against the US dollar, prompting the worst economic crisis in Russia since the country's financial meltdown and debt default in 1998.
The 1am announcement of the monster interest rate hike by the Central Bank of Russia was intended to dissuade savers from pulling their money out of banks, but despite a brief rally of over 9 percent on Tuesday morning, tumbling oil prices — dipping below $60 a barrel -— heaped pressure back on almost immediately, quickly erasing the gains of the previous few hours.
By Tuesday afternoon the ruble had sunk to a catastrophic 80 to the dollar, according to data from the Moscow exchange, well beyond the rate of 60 to the dollar often labeled a "psychological barrier" for Russians who have experienced repeated economic crises in recent decades.
The state bank's early hours intervention followed a jaw-dropping plunge of 11 percent in the ruble's value against the dollar; the exchange rate sunk to a record low of 65.9 in US trading on Monday. The fall means the ruble has now surpassed the Ukrainian hryvnia as the worst performing currency of 2014.
Economic experts, however, say that Central Bank's bid to salvage the situation with a interest rate rise of 6.5 percentage points has only worsened the crisis. "When you raise interest rates by 6.5 percent in an economy that's already tanking, that smacks of panic," Dr Nicholas Spiro, managing director of London-based Spiro Sovereign Strategy, told VICE News. "This has Black Wednesday written all over it — even as we speak the ruble is plummeting."
In emailed comments, Timothy Ash, head of emerging market research at Standard Bank, called the inability of policymakers to stabilize the situation even with such huge hikes in interest rates "incredible" and indicative of a "total loss in confidence [and] credibility… in Russian institutions in charge of monetary policy."
On Tuesday afternoon, the Central Bank's Deputy Chairman Sergei Shvetsov responded to criticism of the handling of the crisis by saying the bank had been forced to make a choice between "the bad and the very bad."
"The situation is critical. A year ago you couldn't have imagined what is happening today in your worst nightmares," he added.
The looming sense of imminent economic disaster was palpable in streets of Russia's capital, where electronics stores were reportedly crowded with Muscovites rushing to convert their hard earned rubles into flat screen televisions, refrigerators and other value-holding goods.
The Russian economy has been teetering for months as the combined bite of falling oil prices and Western sanctions over its involvement in the Ukraine crisis have slowly started to inflict pain on Moscow, Russia's financial hub.
But according to financial insiders, the final tipping point which prompted Monday's dramatic plunge was ultimately market concerns over backroom deals intended to prop up national oil company Rosneft.
Owned by Igor Sechin, a longtime associate of Putin, Rosneft had been desperately clamoring for a government bailout to service debts run up when oil prices were high. On Friday the release of 625 million rubles worth of bonds — bought by unnamed investors believed to be the Central Bank — was widely seen as little more than a virtual money printing scheme, allowing the oil giant to hoard export dollars and still meet a $10 million loan repayment due this month.
Writing on his Facebook page, Boris Nemtsov, a former deputy prime minister — now in political opposition — said that the cause of the current crisis was "well known."
"The central bank started the printing press to help the Sechin-Putin business, and gave Rosneft 625 billion newly printed rubles. The money immediately appeared on the currency market, and the rate collapsed," wrote Nemtsov.
According to experts, however, far more worrying in the long term for Russia than either Western sanctions or the Rosneft scandal is the dramatic and potentially long-term slide in oil prices — with Brent crude, a global benchmark, now at $59.02 a barrel, a level not seen since 2009.
"This is Russia's perfect storm. There is a confluence of factors at play here, but the overriding factor is oil," Spiro told VICE News. "This has pulled the rug from under Russia's oil dependent economy. There is no floor for the ruble, until there is a floor for oil… Significantly there is an increasing view in the markets that what we are seeing is not a supply, glut but waning demand. Now this crisis has started it is very difficult to see what can halt the slide of the ruble; a full-blown financial crisis, possibly involving debt default, is now very much on the cards."
Importantly, however, a major collapse of the Russian economy is unlikely to have the effect desired by the west. Not only will rapid and severe economic decline in Russia likely cause a financial contagion that could damage economies as far afield as Europe and the Middle East, but the crisis could also back Putin into a corner as he attempts to shore up support on other fronts."
"Putin's reputation for macro-economic stability, the reason why much of the middle-class were willing to tolerate the erosion of their political rights, has been destroyed in the last six months… He doesn't have much choice now other than to ram home the nationalist and territorial supposed successes in Crimea and east Ukraine," Ben Judah, a Russia analyst and author of the book Fragile Empire, told VICE News. "The crisis probably isn't enough to topple Putin, but he will believe it is, so the worse the crisis gets the more repressive Russia will become."
Even an astrologist interviewed on Life News, a state-owned Russian television channel, failed to offer a more optimistic reading, glumly predicting that the financial turmoil would last at least another two years until 2017. "You can bet your bottom dollar, the worse things get the more he (Putin) will dig his heels in," finished Spiro. "It will get much worse before it gets better."
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