Russia Raises Main Rate as Ukraine Crisis Threatens Economy

Photographer: Andrey Rudakov/Bloomberg

A Russian national flag flies above the headquarters of Bank Rossii, Russia's central bank, in Moscow. Close

A Russian national flag flies above the headquarters of Bank Rossii, Russia's central bank, in Moscow.

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Photographer: Andrey Rudakov/Bloomberg

A Russian national flag flies above the headquarters of Bank Rossii, Russia's central bank, in Moscow.

Russia raised its main interest rate the most since 1998 as the currency plunged to a record and investors pulled money from the stock market on concern that President Vladimir Putin will invade Ukraine.

The one-week auction rate, the benchmark introduced in September, was increased temporarily to 7 percent from 5.5 percent, the Bank Rossii said on its website today. The regulator also temporarily raised its other major lending rates by 150 basis points, or 1.5 percentage points.

Pro-Russia forces controlling Ukraine’s Crimea region have attacked border posts, while fighter jets violated airspace and more war ships have arrived at Russia’s base on the Black Sea peninsula, Ukrainian authorities said today. U.S. and European leaders threatened sanctions against Russia, raising the risk that economic growth will stall, demand for assets will dry up and a selloff in the currency will deepen.

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“There is a risk of international backlash against Russia at a time when the economy faces an increasing need for foreign capital inflows,” Gillian Edgeworth, chief economist for emerging Europe, the Middle East and Africa at UniCredit SpA in London, said in a note. “This uncertainty risks a further escalation in domestic capital outflow.”

The Micex (INDEXCF), Russia’s benchmark stock index, dropped 11 percent today, the biggest decline since November 2008. OAO Gazprom, which sends half its natural gas exports to Europe across Ukraine, fell 14 percent. The ruble extended its decline to a record 42.6334 against the central bank’s basket at 6 p.m. in Moscow.

Since 1998

A Snapshot of Ukraine's Past and Future

Today’s jump was the biggest in a Russian benchmark rate since June 1998, two months before Russia defaulted on domestic sovereign bonds and devalued the currency. The refinancing rate used to be the central bank’s main reference.

The rate increase may support the ruble in the medium term, central bank First Deputy Chairman Ksenia Yudaeva said in an interview broadcast by state-run Rossiya 24. The regulator will consider easing monetary policy when financial markets stabilize and inflation risks pass, and isn’t planning additional measures to bolster the markets, the Prime news service said.

U.S. President Barack Obamawarned Putin that violating international law “will lead to greater political and economic isolation” for Russia, the White House said March 1. Group of Seven leaders suspended preparations for a June summit in Sochi, the Black Sea resort where Russia hosted the Olympics last month, according to an e-mailed statement today.

Exceeding Targets

Yudaeva said the regulator is focused on reining in inflation and ensuring financial stability. The rate-setting board will meet on March 14 as planned, the central bank said in today’s statement. Policy makers will present a revised estimate of the effect of the currency’s slump on inflation at that session, Prime reported.

A temporary increase in the key rate won’t hurt the economy, while ruble depreciation will spur inflation, Deputy Economy Minister Andrey Klepach said today, according to the Interfax news service. Consumer-price growth has exceeded policy markers’ targets for 17 months, slowing to 6.1 percent in January from a year earlier. The central bank is seeking to keep the inflation rate at no more than 5 percent in 2014 after overshooting its 5 percent to 6 percent goal last year.

In February, the regulator signaled it’s prepared to tighten monetary policy if ruble weakness adds to inflation risks. Earlier, chairman Elvira Nabiullina, appointed in June, had resisted calls for a rate cut to stimulate economic growth while consumer-price growth remained above target.

Foreign Reserves

Russia’s government is struggling to stimulate economic growth, which decelerated to 1.3 percent last year, the slowest since a contraction in 2009.

Incomes declined the most in January since 2011, pushing retail sales, a mainstay of economic growth, to their lowest growth in almost four years. Joblessness and slower expansion in consumer lending sapped household purchasing power.

Foreign reserves fell to a three-year low of $490 billion on Feb. 7, a week after Deputy Economy Minister Andrey Klepach said that capital outflows may reach $35 billion in the first quarter, more than half of the $63 billion that left Russia in all of last year. Reserves have since risen to $493 billion.

The ruble is trading above the upper of the last announced level of the central bank’s corridor, raised to 35.40 to 42.40 on Feb. 28, which means that regulator is selling foreign currency and buying rubles without daily limits to slow its depreciation.

Escalating Tensions

“Such high demand for foreign currency can only be supported if there is further escalation of tension,” Vladimir Kolychev, VTB Capital’s chief economist for Russia, said by phone in Moscow.

Yields on government bonds jumped most after the unexpectedly rate increase aimed at stemming “short-term volatility.” The yield due February 2027 rose 52 basis points, or 0.52 percentage point, to 8.88 percent, the highest since June 2012 and within 21 points of the record high.

“The escalation of the Ukraine crisis, with reports that Russia may have invaded Crimea, represents a major shock to sentiment towards risky assets,” Benoit Anne, head of emerging-markets strategy at Societe Generale in London, said in a note today. “We doubt at this stage that this will be enough,” he said of the rate increase.

To contact the reporters on this story: Vladimir Kuznetsov in Moscow at vkuznetsov2@bloomberg.net; Olga Tanas in Moscow at otanas@bloomberg.net

To contact the editor responsible for this story: Torrey Clark at tclark8@bloomberg.net

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