Russia's central bank makes huge interest rate hike to try to prop up falling ruble

Two men talk to each other at the entrance of a currency exchange office in Moscow, Russia, Monday, Aug. 14, 2023. Russia’s central bank made a big interest rate hike of 3.5 percentage points on Tuesday, Aug. 15, 2023, an emergency move designed to fight inflation and strengthen the ruble after the country's currency reached its lowest value since early in the war with Ukraine. (AP Photo/Alexander Zemlianichenko)
Two men talk to each other at the entrance of a currency exchange office in Moscow, Russia, Monday, Aug. 14, 2023. Russia’s central bank made a big interest rate hike of 3.5 percentage points on Tuesday, Aug. 15, 2023, an emergency move designed to fight inflation and strengthen the ruble after the country's currency reached its lowest value since early in the war with Ukraine. (AP Photo/Alexander Zemlianichenko)

By DASHA LITVINOVA and DAVID McHUGH

Associated Press

TALLINN, Estonia (AP) -- Russia's central bank made a big interest rate hike Tuesday, an emergency move designed to fight inflation and strengthen the ruble after the country's currency reached its lowest value since early in the war with Ukraine.

The ruble has lost more than a third of its value since the beginning of the year as Moscow increases military spending and Western sanctions weigh on its income from energy shipments. The flagging currency does not mean the Russian economy is in freefall -- though it is facing challenges, including rising prices for households and businesses, according to analysts who study Russia.

A lower exchange rate allows Moscow to transfer the dollars it earns from selling oil and natural gas into more rubles to pay pensions and run government agencies. But the drop in value went a bit too far, and officials are now tightening it up, analysts say.

While over time sanctions will erode long-term economic growth, the recently weaker ruble "does not imply an underlying economic crisis, it doesn't suggest Russia is about to fall off a cliff," said Chris Weafer, CEO of Macro-Advisory Partners.

The central bank hiked its key rate 3.5 percentage points to 12% after announcing a meeting of its board of directors a day earlier as the ruble declined.

The Russian currency passed 101 rubles to the dollar Monday, hitting the lowest level in almost 17 months. The ruble strengthened after the rate hike announcement but has since given up some of those gains to hit about 98 to the dollar.

The central bank says demand for goods has exceeded the country's ability to expand output, increasing inflation and affecting "the ruble's exchange rate dynamics through elevated demand for imports."

Until now, the ruble's decline suited the government because it increased the amount of rubles for each dollar of oil revenue, helping the Kremlin maintain spending on the military and social programs, Weafer said.

The government and the central bank have been able to manage the ruble's decline by telling energy exporters when to exchange their dollar earnings. "It is an entirely managed currency," Weafer said.

That intentional devaluation now "appears to be overdone. I think this is now the message from the central bank -- the weakness was planned, but it's overdone and they want to pull it back," he said.

Sergei Guriev, provost and professor of economics at the Sciences Po institute of political studies in Paris, also said "there is no disaster" despite Russia's economy having "big problems" -- such as the decrease in oil and gas revenue, capital fleeing the country, a budget deficit and the weaker ruble.

It was "politically important" for the Russian authorities to have the national currency at less than 100 rubles to the dollar, so once the ruble crossed that sensitive threshold this week, the central bank took action, Guriev said.

After Western countries imposed sanctions on Russia over the invasion of Ukraine in February 2022, the ruble plunged as low as 130 to the dollar, but the central bank raised its key interest rate to as high as 20% in the days afterward and enacted capital controls that stabilized the currency's value. It later began cutting rates.

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