From Ruble to Rubble in a Heartbeat
The Russian ruble has been in panicked free-fall, not unlike the oil price. Last night the Russian central bank reacted by hiking its interest rates, not in baby steps, but rather in giant strides. This was incidentally the second rate hike in just four days and the fifth this year. From the press release:
“From 16 December 2014 the Bank of Russia Board of Directors decided to raise the Bank of Russia key rate to 17.00 percent per annum. This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks.
From 16 December 2014 in order to strengthen the efficiency of monetary policy loans secured by non-marketable assets or guarantees for 2 to 549 days will be provided at a floating interest rate, set at the Bank of Russia key rate level, increased by 1.75 percentage points (up to the present these loans for 2 to 90 days were provided at fixed rate).
Moreover, for further expanse of credit institution ability to manage their foreign exchange liquidity it was decided to increase maximum allotment amount for28-day FX REPO auctions from 1.5 to 5.0 billion USD and to conduct 12-month FX REPO auctions on weekly basis.”
To help readers to appreciate what a giant move in rates this was, here is a table showing the rates after the last rate hike on December 12 compared with those instituted yesterday:
Click on picture to enlarge
Overnight liquidity provision goes from 11.5% to 18%, 3 month rates go from 10.75% to 17.25%
The reason for this was the aforementioned panicked sell-off in the ruble, which looks like this over the past nine months:
USD-RUB: The ruble turns to rubble
Does this move make much sense? We actually don't think so – oil is certainly very important for Russia's economy, but a recent study of the Russian economy (pdf) concludes that the energy industry actually contributes only 16% to total economic output in Russia. The reason why people in the West are somewhat less aware of what Russia produces is that it is exporting a lot to former Eastern Bloc satellites and former Soviet Republics. Some Russian products are also well-known and well-liked in the West though, such as e.g. Kaspersky anti-virus software (which works like a charm).
