Russian ruble down sharply despite rate hike

MOSCOW (AP) -- The Russian ruble has regained some ground after declining by a whopping 20 percent earlier Tuesday.

The ruble extended Monday's collapse - when it declined by 10 percent - despite the pre-dawn interest rate increase to 17 to 10.5 percent by the country's central bank.

It traded at 72 per dollar late Tuesday afternoon - more than 60 percent down from where it was in January.

The currency has been battered by sliding oil prices as well as the sanctions that the West has imposed on Russia over its involved in Ukraine.

Russia's Central Bank announced a massive interest rate hike before dawn Tuesday but the move failed to stem the selling pressure on the ruble, which slid another 20 percent to new historic lows.

The surprise Central Bank decision to raise the rate to 17 percent from 10.5 percent in the middle of the night represented a desperate attempt to prop up the country's troubled currency. The ruble has fallen sharply in recent weeks as a result of sliding oil prices as well as the pressure from Western sanctions over Russia's involvement in Ukraine.

The move aims to make it more attractive for currency traders to hold onto their rubles - doing so gives them a major return, certainly in comparison to many other currencies, such as the dollar, where the interest rate returns are near zero percent.

Other options available to the Russian authorities to stem the selling tide could be imposing capital controls or actual intervention in the markets - buying rubles, for example. The central bank has intervened directly in the past few months.

In the first hours after the increase, the ruble staged a rebound, recovering almost all of its Monday losses. But the optimism soon dissipated and the ruble was down another 20 percent to 77 to the dollar by 3.30 p.m. in Moscow (1230GMT).

Central Bank chairwoman Elvira Nabiullina said the decision should stem inflation and encourage Russians to open ruble-denominated deposits. However, she conceded that the ruble's value will not be immediately influenced by the rate hike and said it will take the ruble "some time" before it finds a fair value.

The Central Bank has won some plaudits for pursuing a tight monetary policy. Though it may not have stemmed the fall of the ruble, it has kept the finances in order. Tuesday's move seems to be an indication that the Kremlin is ready to employ market measures to cushion the blow but is not yet so desperate that it's ready to impose capital controls.

The ruble has lost half of its value this year. But the decline intensified in the past months as the economy came under pressure from Western sanctions and plunging oil prices.

"With these steps, the Central Bank is looking to bring stability back to the (foreign exchange) market, which has been behaving irrationally over the last few weeks," Moscow-based investment bank Sberbank-CIB said in a morning note. "This state of affairs required extraordinary measures from the Central Bank - and such measures have now been taken."

Higher interest rates may eventually offer support to the ruble but it's likely to cause much hardship in an economy that's already heading for recession. Russian stocks were moderately declining Tuesday morning with the MICEX benchmark 1.5 percent lower, reflecting the rate hike's pressure on businesses.

Neil Shearing, chief economist for emerging markets at London-based Capital Economics, said the will cause "a further tightening of credit conditions for households and businesses and a deeper downturn in the real economy in 2015."

Given Russia's huge dependence on oil revenues, the recent sharp falls in the price of oil has hit the Russian economy hard. That's exacerbated by the fact that the Russian economy isn't diversified enough to withstand the shock.

The average price of a barrel of oil has dropped below $56 from a summer high of $107. The government recently downgraded its forecast for next year, predicting that the economy will sink into recession.

The falling ruble has intensified inflation pressures by making imports more expensive, pushing the central bank to gradually increase its main interest rate from 5.5 percent early this year. Last Thursday, it tried unsuccessfully to stem the ruble's slide by boosting its key rate by 1 percentage point to 10.5 percent.

One visible side-effect of the currency's fall has been an increase in demand for durable goods, such as washing machines and cars as they are overwhelming imports. Major automotive dealers, for one, are reporting sales up 15 to 30 percent in November, according to RIA Novosti news agency.

Alexei Kudrin, Russia's finance minister in 2000-2011, said on Twitter following the rate hike that "the fall of the ruble and the stock market is not just a reaction to low oil prices and the sanctions but also (a show of) distrust to economic policies of the government."

Kudrin added that the rate hike "should be followed by government measures to raise investor confidence in the Russian economy." He did not say what steps he advocated.

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