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Russia in Shock Interest Rate Hike

Tuesday, December 16, 2014

Last night the Russian central bank made the shock decision to increase its key interest rate to 17%.

The drastic increase of 6.5% was designed to ease the rouble's recent decline in value. This year the rouble has lost almost 50% against the US dollar amid falling oil prices and Western sanctions.

Yesterday the dollar bought 67 roubles, but the rate rise did provide some respite as it moved up to 58 against the dollar in early trading. However, the rate has since fallen back to 62 as concerns remain that the biggest rate hike since 1998 might not be enough to stabilise the currency.

In 1998, Russian interest rates soared past 100% and the government ended up defaulting on its debt. There is now the concern that a further weakening in the oil price may push the Russian economy to the brink.

Oil and gas represents approximately two thirds of Russia's exports, and public expenditure is almost completely dependent on energy-related revenues. In their absence, government debt would increase by more than 10% per year.

With the economy already expected to contract by 5% next year and inflation running at 9%, investors are certain to keep a close eye on the situation.