Russia aids ruble with big rate rise + video

Russia's dramatic rate rise to 17 per cent comes as the ruble falls to a record low against the US dollar. Photo / AP

Russia took its biggest step yet to shore up the ruble and defuse the currency crisis threatening its stricken economy.

In a surprise announcement made just before 1am yesterday in Moscow, the Russian central bank said it would raise its key interest rate to 17 per cent from 10.5 per cent.

The move is the largest single increase since 1998, when Russian rates soared past 100 per cent and the Government defaulted on debt.

It prompted an immediate gain in the ruble, with one-month ruble forwards up 1.6 per cent in Asian trading.

Yet the announcement, as well as its timing, underscored the financial straits in which Russia finds itself.

If sustained, the new higher rates will squeeze an economy that is already being hurt by sanctions led by the US and European Union, and by a collapse in oil prices. Some analysts doubt the economy can withstand such high rates for long.

Russia has this year spent US$80 billion of its foreign exchange reserves in an unsuccessful attempt to prop up the ruble, which tumbled past 64 against the US dollar for the first time on Monday.

The currency's collapse has evoked the turmoil of the 1998 Russian crisis, an event that reverberated around the world.

The Russian central bank announced the increase - the sixth this year - after policymakers gathered for an unscheduled meeting.

"This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks," the central bank said.

President Vladimir Putin, whose incursion into Ukraine's Crimean peninsula in March prompted the US and its allies to impose sanctions, this month called for "harsh" measures to deter currency speculators.

The ruble lost 9.7 per cent to be at 64.4455 per US dollar on Monday, extending its plunge this year to 49 per cent.

Brent, the grade of oil traders look at for pricing Russia's main export blend, slipped US79c, or 1.3 per cent, to US$61.06 a barrel on the ICE Futures Europe exchange in London.

"There is a feeling that this rate hike is unfortunately not going to be enough," said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. "Russia's central bank has tried every trick in the book with the exception of full-blown capital controls."

Others were more optimistic, saying the action was big enough to arrest the ruble's record decline.

"The central bank is trying to stop the avalanche, and such a massive hike may be sufficient," said Slava Breusov at Alliance Bernstein in New York.