Sunday

17th Feb 2019

Russian rouble in free fall over oil price, EU sanctions

  • It is the highest interest rate increase since 1998 (Photo: Alex F)

In a surprise announcement on Monday (15 December), the Russian central bank said it would raise its key interest rate to 17 percent from 10.5 percent.

The move is aimed at shoring up the tumbling currency as the Russian economy feels the pain of a low oil price - oil and gas are Russia's main exports - combined with US and EU sanctions over Russian involvement in the Ukrainian war.

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It is the highest interest rate increase since 1998, when the Russian currency collapsed and the government defaulted on its debt, sending ripples throughout financial markets around the world.

“This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks,” the central bank said in a statement after its impromptu meeting.

The rouble lost 9.7 percent to 64.4 per US dollar on Monday alone, after having slid almost 50 percent this year in comparison to the dollar. One euro now buys 77 roubles, compared to 45 roubles in January.

About half of Russia's budget revenues come from oil and gas taxes and a quarter of its GDP is linked to the energy industry.

With the oil price having started to fall from above 100 US dollars a barrel in June to 60 dollars now, Russia's economy is feeling the pinch. On top of this comes the closed access to EU and US capital markets as part of the joint sanctions.

The central bank in Moscow expects the economy to contract by 4.5 to 4.7 percent next year if oil prices remain this low.

With the US and its ally Saudi Arabia determining the oil price, it is likely the squeeze will continue until Russian President Vladimir Putin reverses his course in Ukraine.

So far, he has kept a defiant stance and has offered amnesty to Russians who bring money - no matter how it was earned - back into their country.

Other forms of 'patriotic' support appear in hipster Moscow shops, with tshirts displaying the message "I support the rouble," as AP's Moscow correspondent has tweeted.

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