Bank of Russia Critics Now See Wisdom in 2014 Super Rate Raise


Russia’s drastic move last December to raise its key rate to 17 percent to stop the ruble’s free fall was met with dismay by many. A year later, it’s won over admirers.

Jean-David Haddad, an emerging-markets strategist at OTCex Group brokerage in Paris, dismissed the decision at the time as a “failure.”

“Like everyone else, I panicked,” he said by phone last week. Back then, “the situation was critical and could spin out of control.”

Economists, executives and government officials piled criticism on central bank Governor Elvira Nabiullina for her midnight rate shocker. The fear was that the biggest rate hike since 1998 could grind the economy to a halt. Moreover, the ruble didn’t show immediate signs of stabilization. For many it brought back bad memories of the 1998 financial crisis.

“The measure was seen as extreme, but looking back it helped stabilize the currency, financial markets, and turn things around,” Haddad said.

Green Shoots?

Even though Russia is still mired in a recession and growth probably won’t resume until 2017, there are now the first signs pointing to a recovery. A flexible ruble is helping offset the drop in oil prices, while inflation growth is slowly being tamed. Moody’s Investors Service in December increased its outlook on Russia, while asset managers at Bank of America Corp. to UBS Group AG and Wells Fargo & Co. turned bullish on the nation’s stocks.

“Everyone was surprised by the ability of the economy to adjust,” Gerardo Rodriguez, a money manager at BlackRock Inc., said in New York last week. “A combination of measures including increasing the key rate and sending the ruble into a free float in 2014 helped the central bank to navigate market turbulence and a slump in oil prices.”

He added, “that doesn’t mean that all the structural challenges and the secular economic decline have changed, but that was a very positive surprise in a very tough market environment.”

Ruble Slump

The ruble got hammered in 2014 as crude oil, Russia’s biggest export, sank into a bear market and sanctions over the Ukraine conflict tipped the economy over the edge. Monetary officials adjusted to the new economic reality by dispatching the currency into a free float in November of that year and raising the key rate to levels that deterred currency speculators from betting against the ruble.

The December hike was the sixth rate increase in 2014 after officials burned through more than $80 billion in the reserves to defend the currency, prompting President Vladimir Putin to publicly criticize the central bank for moving too slowly. Since then, there have been five rate cuts that have brought the benchmark rate back down to 11 percent in July.

The central bank left the benchmark rate unchanged for a third consecutive meeting on Friday. Going forward, it estimates the economy will shrink 0.5 percent to 1 percent in 2016 before growing as much as 1 percent in 2017. The slump is still rippling through consumer demand and inflation remains around four times the 2017 target of 4 percent.

The ruble weakened 3.2 percent last week to 70.3620 against the dollar, the lowest level since August. Brent crude tumbled 11 percent to $38.16 in the biggest five-day drop in over a year.

Bigger Picture

“You need to always look at the context of what a central bank is working with,” James Barrineau, co-head of emerging-market debt relative at Schroder Investment Management, said by phone last week. We “needed time to demonstrate that the market had gained some confidence in the central bank. And we saw that happen.”

Investors who stuck with Russia through the turmoil in its financial markets this year have been rewarded with returns of about 21 percent on local-currency debt. That outpaced gains in all other sovereign bonds and compared with an average loss of 1.8 percent among developing-nation peers tracked by Bloomberg.

The negative effect of sanctions and low oil prices on foreign-exchange reserves this year has been milder than expected as policy adjustments including a floating exchange rate and the steep depreciation of the ruble have “helped mitigate the shocks,” Moody’s said in December.

“Even as the financial risks remain high and the macroeconomic situation remains difficult, we are nowhere near the panic mode we went through a year ago,” Pavel Laberko, who helps manage $150 million in emerging-market assets at Union Bancaire Privee in London, said by phone last week. “There is a lot of work ahead on the road to recovery, but there is some optimism that the worst is over.”


Please enter your comment!
Please enter your name here