Russia Calls Emergency Key Rate Meeting as Ruble Plunges

(Bloomberg) — Russia’s central bank called an extraordinary meeting Tuesday after the ruble crashed through the level of 100 to the dollar for the first time since March of last year as Russia’s war in Ukraine drags on and international sanctions hit trade.

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Policy makers will publish a statement on the key rate at 10:30 a.m. after the meeting, the Bank of Russia said in a statement, without giving any further details. The central bank hiked its key rate by a percentage point to 8.5% last month, the first increase since emergency measures imposed immediately after the invasion of Ukraine in February 2022.

The exchange rate has emerged as the barometer of health for an economy battered by shrinking export revenues and its isolation from international financial markets, bringing infighting between the government and central bank into the open.

The ruble reversed losses after the announcement, traded up 1.8% at 97.6625 at 7 p.m. in Moscow. The currency, which had broken through 101 earlier on Monday, has weakened about 27% this year for the third-worst performance in emerging markets. The central bank had sought to arrest the slump by saying it won’t purchase foreign currency on the domestic market for the rest of 2023.

Kremlin economic aide Maxim Oreshkin blamed the central bank for contributing to the depreciation, an unusual rebuke made public just moments before the Russian currency broke through 100 to the dollar. Bank of Russia Governor Elvira Nabiullina has repeatedly cited deterioration in trade as the main reason for the ruble’s weakness.

Writing in a rare column published by state news agency Itar-Tass, President Vladimir Putin’s chief economic adviser said “the source of the weakening of the ruble and the acceleration of inflation is soft monetary policy.” Russia needs a strong ruble, and policymakers have the necessary tools to normalize the currency value in the near future, he said.

Earlier on Monday, the central bank repeated that it currently doesn’t see any threats to financial stability from the ruble’s performance and allows for the possibility of raising interest rates at its coming meetings.

The value of exports is facing a “significant reduction” at a time when demand for imports is on the rise against the background of elevated government spending and also as a result of fast lending growth, it said in a statement.

The public airing of grievances hints at discord in the highest echelons of the Russian establishment over how to respond to a crash in the ruble that pulled it to levels last seen weeks after the invasion of Ukraine in February 2022.

The central bank announced last week it wouldn’t buy foreign currency on the domestic market under a budgetary mechanism that was put in place to insulate the economy from swings in commodity prices. The decision aimed to “reduce the volatility of financial markets,” it said.

What Bloomberg Economics Says…

“To stabilize the ruble, we estimate the policy interest rate needs to rise closer to 10% and federal budget spending must be kept within the fiscal ceiling. The ruble may benefit from higher crude oil prices, but domestic monetary policy will remain a more reliable anchor for the currency. The Bank of Russia will need to hike the policy rate by 50-100 basis points at its Sept. 15 meeting to boost domestic savings and reduce imports.”

—Alexander Isakov, Russia economist. For more, click here

The suspension of foreign-exchange purchases “has failed to stabilize the currency,” according to JPMorgan Chase & Co., which now expects the central bank to raise its benchmark to 10% by the end of the year, up from its previous call for 9%.

The central bank continues to adhere to a floating exchange-rate policy that “allows the economy to adapt effectively to changing external conditions,” Deputy Governor Alexey Zabotkin told reporters Friday.

Budget Situation

But in what amounted to a defense of government policies, Oreshkin said authorities “managed to stabilize the budget situation” and expect to run a surplus in the third quarter, with the year-end deficit seen in line with the planned 2% of gross domestic product.

In the remainder of the year, the amount of extra proceeds from oil and gas sales will reach about 800 billion rubles ($8 billion) above a baseline level in the budget, allowing the government to rely less on its wealth fund to cover the fiscal deficit, he said.

Revenues of Russian oil and gas exporters declined to $6.9 billion in July from $16.8 billion in the same period last year, according to the latest central bank data. An easing of restrictions on moving money abroad has also led to accelerated capital flight as Russians race to shift funds into foreign accounts.

“The weakening of the ruble is the result of the international screws tightening around the Russian economy, but also the cost of keeping the economy going,” said Erik Meyersson, chief emerging-market strategist at SEB AB in Stockholm. “Nobody wants to hold rubles, and the limited supply of foreign exchange from exporters weighs on the currency.”

–With assistance from Srinivasan Sivabalan, Colleen Goko, Evgenia Pismennaya and Paul Abelsky.

(Refreshes prices starting in fourth paragraph)

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