Russian rouble in free fall

The rouble plunged by more than 11% against the dollar yesterday in its steepest intraday fall since the Russian financial crisis in 1998, as confidence in the central bank evaporated after an ineffective rate hike.

The rouble opened around 10% stronger against the dollar after the central bank unexpectedly raised its benchmark interest rate by a hefty 650 basis points to try to halt the currency's slide, but it reversed gains in volatile trade and repeatedly set new record lows.

It has now fallen by close to 20% this week, taking losses this year against the dollar to more than 50%, and raising memories of the crisis in 1998, when the currency collapsed, forcing Russia to default on its debt.

Russia's public finances and reserves are much healthier than in 1998, but analysts say the country is on the brink of a full-blown currency crisis.

The rouble was almost 13% weaker against the euro at 90.50.

The rouble has been hit by the slump in oil prices and Western sanctions imposed over Russia's involvement in Ukraine, but its sharp decline over the past two days also reflects declining confidence in the central bank.

The 650-basis-point rate hike, less than a week after a 100-basis-point rise, was seen as a sign of desperation by the bank, whose governor, Elvira Nabiullina, now appears powerless to stop the currency's slide, raising the risk of capital controls.

The market ignored Nabiullina's comments yesterday that the rouble was undervalued.

"If such an interest rate rise didn't impress the market, then they [the central bank] have left the option of interventions of $10-billion a day. They are in [the market] every day," said Natalia Orlova, chief economist at Alfa Bank.

Investors were also unnerved by the prospect that Russian oil major Rosneft, which recently issued 625billion roubles in bonds, could convert the funds into foreign currency, adding further pressure on the rouble.

Rosneft said the money will not be used to buy foreign currency.

Russia's dollar-denominated RTS share index was down by as much as 19% at one point, extending heavy losses from Monday, and shares in top bank Sberbank - seen as a barometer for the wider economy - plunged by 20%. Russian sovereign dollar bonds fell and money market rates jumped.

President Vladimir Putin blamed both the slide in oil and the rouble on speculators and the West. A weak rouble poses a major test for Putin, since his popularity depends partly on his reputation for guaranteeing prosperity and stability, and it stokes inflation.