The Wall Street Journal reports,Russia pumped up interest rates aggressively Monday as its currency and stock market plunged, suggesting that the country's military buildup in Crimea could backfire on the economy.
A slide in the ruble in recent months has already been putting pressure on some parts of Russia's economy. Data released on Monday showed that the country's manufacturing sector had contracted for the fourth consecutive month, with the weaker ruble adding to import prices.
But following the escalation of tensions around Crimea, and Moscow's threat to send troops to Ukraine, the currency fell further, to more than 37 to the dollar and more than 51.2 to the euro, prompting the Central Bank of Russia into a 1.5-percentage-point interest-rate rise, taking the key rate to 7%, to try to stabilize the markets. It also bumped up its repo rate, at which banks receive liquidity, to 8%, and banks said it sold dollars heavily to support the currency.
The rate hike, which the central bank said was temporary, may put additional pressure on flagging economic activity. In 2013, economic growth slowed to 1.3%, its weakest pace since President Vladimir Putin came to power in 2000.
A weaker ruble is a boon for Russia's exporters. But by boosting import prices, it also carries risks for inflation, which the central bank plans to contain at 5% this year.
Analysts at VTB 24, a retail arm of the country's second largest lender VTB, said in a note that it was too late now to ditch rubles for dollars. VTB 24 said on its website it is ready to sell cash for 37.90 rubles per dollar and 52.50 rubles per euro, far above the central bank's official rate of 36.37 and 50.15 respectively. Other foreign-currency vendors across the country said they were seeing increased demand for cash.
"People are buying currency much more activley than before; there is a line in the exchange office of the bank," said Nina, an Otkritie Bank employee in Siberian city of Krasnoyarsk, who declined to give her surname.
Other markets also suffered a heavy selloff, potentially imposing losses on wealthy business owners in the region. Russia's Micex stock index dropped to its lowest since June, losing more than 10% on the day. All the blue-chip stocks slid into negative territory, with Gazprom, the country's most liquid stock, down 11%. The state-run gas giant has a vital pipeline running through Ukraine for delivering energy to Europe.
All the Russian assets are being sold now. It is a panic, the market is nervous and one should not wait for positive news," said Egor Fedorov, an analyst at ING Bank in Moscow.
Citigroup said that the Russian-listed companies most exposed to Ukraine are Gazprom, Mobile Telesystems, VimpelCom Ltd., VTB Bank, Sberbank, and Evraz. "Russia serves as a proxy for playing a fraught situation in Ukraine, with equity and fixed-income markets coming under severe market pressure," said Ivan Tchakarov, chief economist at Citigroup in Moscow.
