Russia: Ruble takes a hit due to tensions with Ukraine prompting Central Bank action
March 3, 2014
The risk of a military confrontation with Ukraine triggered volatility within Russian financial markets at the beginning of the month, which prompted the Central Bank to take action unexpectedly. The recent events have thus raised concerns about the country's growth prospects for the year. The approval of President Vladimir Putin's request to deploy armed forces in Ukraine on 1 March triggered a sell-off of Russian assets and caused the ruble's value to plunge on 3 March. The Central Bank reacted and held an unscheduled policy meeting that morning in which it decided to temporarily raise the key policy 1-week repo rate from 5.50% to 7.00%, which is the highest the rate has been since September 2009. The unexpected monetary tightening came shortly after the 14 February meeting in which the Bank decided to maintain the policy rate unchanged. The Central Bank reported that the decision, “was aimed at preventing the risks for inflation and financial stability arising from the recent increase in financial market volatility.” In addition, in order to prop up the ruble, the Central Bank intervened strongly in the foreign exchange market and sold currency amounting to a total of USD 11.3 billion. The prompt intervention was not enough to stop the currency's plunge; it ended the day at the lowest level on record against both the U.S. dollar and the euro. Pressure on the currency only eased up over the following days, when it became clear that direct Russian military intervention in Ukraine was not imminent after all. It remains to be seen whether the Central Bank will backtrack on this decision when it meets again on 14 March. As geopolitical instability persists, the possibility that the Central Bank will lower rates (which could take place as soon as 14 March) depends greatly on the impact that developments in the geopolitical sphere have on the stability of the ruble. FocusEconomics Consensus Forecast panelists expect the ruble to trade at 34.9 RUB per USD by the end of 2014. For 2015, panelists expect the ruble to end the year at 35.6 RUB per USD. The confrontation with Ukraine is expected to have a strong impact on the already weak Russian economy. Tighter financial conditions, combined with uncertainty surrounding the developments in the region, may prompt businesses to scale back or delay investment decisions. Consumer spending may also be severely hit by higher inflation caused by a weaker ruble. Depending on the development of the crisis, the Russian economy may also be affected by economic sanctions currently contemplated by the United States and the European Union in response to the conflict with Ukraine. Within this setting, FocusEconomics Consensus Forecast panelists expect GDP to grow 2.0% in 2014, which is down 0.2 percentage points from last month's forecast. Next year, the panel sees the economy growing 2.5%.
Author: Armando Ciccarelli, Head of Data Solutions