Russian central bank hikes interest rates to 12 percent as ruble falls

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Russia’s Central Bank on Tuesday raised the country’s key interest rate by 3.5 percentage points to 12 percent — a significant increase that was preceded by the ruble’s tumbling to its lowest point in 17 months.

The Russian currency has lost almost a quarter of its value against the U.S. dollar since President Vladimir Putin began an invasion of Ukraine in February 2022, and it has decreased steadily against major world currencies in recent weeks. The country’s economy has been battered by Western sanctions, inflation and an acute labor shortage, caused in part by men fleeing abroad to avoid military conscription.

In a statement Tuesday, following its action at an emergency meeting, the Central Bank did not mention the drop in the value of the ruble. Instead, the bank attributed the interest-rate hike to “inflationary pressure” caused by “steady growth in domestic demand surpassing the capacity to expand output.”

The decline of the ruble, and the increased pressure on the economy, comes as sanctions have hammered Russia’s trade balance and military spending has soared as a result of the grinding war in Ukraine.

Video released by the Ukrainian Military showed a Ukrainian surface drone approaching a Russian warship in a naval base near Novorossiysk, Russia, on Aug. 4. (Video: Ukrainian Military via Storyful)

While the bank insisted earlier on Monday that the sudden depreciation would not harm the country’s overall financial stability, Putin’s economic adviser Maxim Oreshkin appeared to criticize the bank, writing in an op-ed for the state news agency Tass that the source of the weakening of the ruble was a “soft monetary policy.”

“The Central Bank has all the tools to normalize the situation in the near future,” Oreshkin wrote.

A budget deficit and a significant labor shortage also have contributed to the spike in inflation.

More than 40 percent of Russian industrial enterprises reported a shortage of workers last month, according to a survey — an acceleration of a trend that has been building since September, when Putin launched a nationwide military mobilization to shore up Russian forces in Ukraine.

The Russian economist Sergei Guriev, who is provost of Sciences Po university in France, said the ruble’s fall against major world currencies was “politically important” as this is what the Russian public feels and sees daily.

“The difference between 50 rubles to the dollar in 2020, and 100 today is something every citizen can observe … even those who are convinced and brainwashed by TV propaganda,” Guriev told The Washington Post.

“This depreciation hits Russian households. … On the other hand, when the Central Bank increases the interest rate, that also hits Russian borrowers, firms and households with outstanding loans,” Guriev continued. “This will slow down Russian economy and therefore undermine the increase in the real incomes and purchasing power of Russian citizens’ incomes. There is no doubt about this.”

The new depreciation marks a reversal, he said, to “a reality where Russia no longer exports a lot and imports very little,” adding that a Western boycott of most Russian oil started to be felt only at the beginning of this year.

He added that the recent mutiny against the Russian military leadership by Wagner mercenary boss Yevgeniy Prigozhin, as well as the expropriation of Western companies still operating in Russia, also contributed to capital outflow and helped to weaken the ruble.

Sergey Aleksashenko, a former Russian finance minister, told The Post that the ruble’s devaluation had been caused by a “growing mistrust in Putin’s economic policy and the country’s future” and said that Putin’s order to replace dollar and euro payments for Russian exports with “friendly currencies” had reduced the supply of such currencies needed for import.

Some economists played down the sudden currency drop, suggesting that it represented a consistent pattern of depreciation and inflation acceleration since the invasion, rather than a spontaneous crisis.

Aleksashenko said the rate hike will not result in any visible effect economically.

“Perhaps the current acceleration will lead to a tsunami depreciation, but this has not happened in the past,” said Oleg Itskhoki, a professor of economics at UCLA. “So it is not very likely, although not impossible, unless it triggers panic and a mass switch of savings from rubles to dollars by the broader public.”

Guriev also said he did not consider the recent developments to be critically damaging to the Russian economy.

“I think it’s normal that Russian Central Bank stays committed to its inflation target and raises interest rates when it sees that inflation is getting out of control,” he said. “On the other hand, the question is to what extent further depreciation is possible if the Western coalition can tighten the sanctions pressure on the Russian economy.”

It is not the first time the bank has taken emergency measures during a crisis. At the end of February 2022, just days after the invasion, the bank raised the key rate to 20 percent from 9.5 percent.

And in 2014, after Russia’s illegal annexation of Ukraine’s Crimea and an initial battery of Western sanctions, the bank raised the country’s interest rate to 17 percent from 10.5 percent.

Such increases, which rank among the largest ever announced by the bank, echo measures taken during the 1990s when Russia defaulted on its debt and devalued the ruble.

Elsewhere in Russia, a Moscow court on Tuesday convicted retired Russian military intelligence colonel Vladimir Kvachkov — a vehement pro-war figure — of discrediting the military, as the Kremlin seeks to bring nationalist pro-war critics to heel.

The 74-year-old retired colonel — who served in the military intelligence agency the GRU and who has called for a tougher approach in the war against Ukraine — told the court that Putin, Defense Minister Sergei Shoigu and Chief of the Russian General Staff Valery Gerasimov were discrediting the military, before Judge Alesya Orekhova sharply cut him off, the Russian media outlet Mediazona reported from the court.

Kvachkov was fined 40,000 rubles, about $408, in the case, reinforcing the message that Russian authorities no longer will tolerate criticism of the military’s conduct of the war, even from pro-war, nationalist former military officers.

The case followed last month’s indictment of the pro-war nationalist Igor Girkin, who was detained on charges of inciting extremism over his criticism of Putin and his demands that Russia take a harsher approach in the war.

Meanwhile, in Ukraine, Russia attacked the western region of Lviv with cruise missiles in the early morning hours, according to regional governor Maksym Kozytskyi. He said that at least 20 houses were destroyed, including one functioning as a kindergarten. Fifteen people were injured, including a 10-year-old and a 72-year-old, he said.

In Britain on Tuesday, three suspected spies for Russia who were living and working in the U.K. were charged in a major national security investigation, the BBC reported, describing them as Bulgarian nationals.

London’s Metropolitan Police said in a statement that five people were arrested in February and that three were later charged under the Official Secrets Act with possessing “false identity documents with improper intention.”

The police did not specify what the documents were. The BBC reported that the police investigation revealed that the suspects were working for Russian security services and had passports, identity cards and other documents for Britain, Bulgaria, France, Italy, Spain, Croatia, Slovenia, Greece and the Czech Republic.

The police identified the three people charged as Orlin Roussev, 45, Bizer Dzhambazov, 41, and Katrin Ivanova, 31. Dzhambazov and Ivanova shared the same residential address.

Karla Adam in London and Robyn Dixon in Riga, Latvia, contributed to this report.

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