MOSCOW -- The Russian ruble was under intense selling pressure Tuesday, falling at one point by 20 percent to a historic low despite a huge pre-dawn interest-rate increase from Russia's central bank. Russian officials were clearly rattled even though state television urged citizens not to panic.
"The situation is critical," Sergei Shvetsov, the deputy central bank chairman, was quoted by Russian news agencies as saying. "We could not have imagined what is happening in our worst dreams."
The central bank's decision in the middle of the night Tuesday to raise the interest rate to 17 percent from 10.5 percent appeared to be an attempt to prop up the currency. The ruble has fallen sharply in recent weeks and is down more than 60 percent since January, because of sinking oil prices as well as the effect of Western sanctions imposed over Russia's involvement in Ukraine's crisis.
The ruble's collapse has spurred ordinary Russians to rush out and buy imported products such as refrigerators and cars, since inflation is making those items more expensive daily. It also is likely to heap pressure on President Vladimir Putin, despite wide popular support.
The ruble traded at 72 per dollar by late Tuesday afternoon -- a modest improvement from earlier, when it hit 78.5 to the dollar.
Timothy Ash at London-based Standard Bank described the ruble's fall as "the most incredible currency collapse I think I have ever seen in the 17 years in the market, and 26 years covering Russia."
"There is now a huge credibility gap for Russian policymakers in the eyes of the market," he said, adding the decline is all the more astonishing given Russia's solid foreign currency reserves and the fact that it runs a budget surplus.
Oksana Dmitriyeva, deputy chief of the Fair Russia faction at the Russian Duma, blamed the collapse of the ruble on the central bank's "chaotic and unprofessional" policies. She said "the government has no strategy" and whether the ruble withstands the decline "depends on official policies."
The bank's interest-rate move Tuesday aimed to encourage currency traders to hold on to their rubles -- doing so gives them potentially big returns, certainly in comparison with many other currencies, such as the dollar, where the interest-rate returns are near zero percent.
The ruble's decline Tuesday was fueled by some opaque trading Monday involving Rosneft, a company hard hit by Western sanctions that is run by Putin's close ally Igor Sechin.
Rosneft, Russia's largest oil company, raised about $10.9 billion in bonds Friday at yields below those on equivalent government securities. The central bank approved the securities to serve as collateral in a ruble auction Monday, meaning bondholders will have access to the bank's cash.
The disclosure of the bank's movement shook the markets Tuesday because it resembled direct support for a specific company.
Sechin has been pleading for a government bailout to refinance the debts of Rosneft, which faces Western sanctions and has been cut off from Western debt markets.
The company, however, denied allegations that it was dumping rubles because of the economic situation, saying it was selling "exclusively for attracting financing for its projects in Russia." It pledged that "not a single ruble... will be used to buy foreign currency."
State television, meanwhile, insisted a weak ruble is good for the economy because it will stimulate domestic production and make exports cheaper.
Central bank Chairman Elvira Nabiullina said the rate increase should stem inflation -- higher borrowing costs effectively choke economic activity, dampening price pressures. However, she conceded that the ruble's value will not be immediately influenced by the rate increase and said it will take the ruble "some time" before it finds a fair value.
Given Russia's dependence on oil revenue, the recent sharp falls in the price of oil have hit the Russian economy hard. That's exacerbated by the fact that the Russian economy isn't diversified enough to withstand the shock.
Alexei Kudrin, Russia's finance minister in 2000-2011, said on Twitter after the rate increase 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."
Business on 12/17/2014