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Faltering Russian economy to take further hits from surprise interest rate rise

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Faltering Russian economy to take further hits from surprise interest rate rise
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In a surprise move Russia’s central bank put up the cost of borrowing on Friday.

Its main interest rate was raised by 0.5 to 8.0 percent, which will further slow economic growth.

A statement from the bank repeatedly mentioned geopolitical tensions, indicating this was in preparation for possible further Western sanctions over Ukraine.

Worries about inflation was another reason given, but Timothy Ash, head of emerging markets strategy at Standard Bank in London, disagreed.

He said: “This has nothing to do with inflation – with the economy failing to fire, the central bank should be cutting rates.”

“This is more to do with the central bank raising the defences on the assumption that further Western sanctions are going to follow, hiking capital flight and likely putting downward pressure on the rouble.”

Previous sanctions have caused many foreigner investors – and those Russians who can – to move their money out of the country.

Such capital flight is estimated by Russia’s central bank to have totaled $74.6 billion in the first half of the year, compared with $61 billion in the whole of last year.

That, along with the sanctions, is hitting Russia’s economy hard.

Government officials have the sanctions’ impact as “peanuts,” but former Finance Minister Alexei Kudrin, respected by investors, warned this week Russia had already lost 1.0 percent GDP growth and might lose more in coming years.

“Russia is yet to choose its decision, which it will announce to the world in regard to settling the conflict in Ukraine,” Kudrin said in a rare criticism of Kremlin policies.

On Thursday the International Monetary Fund revised its growth forecast down to 0.2 percent for all of this year – a big drop from last year’s lacklustre 1.3 percent GDP expansion.

And the IMF’s chief economist Olivier Blanchard said that forecast does not include the effects of recent sanctions the US has imposed and does not take into account any European Union sanctions: “These sanctions could probably further decrease the growth rate of Russia.”

The risk is that Russia will be pushed into recession. It already recorded zero growth in the second quarter.

The textbook way to counter that would be by cutting interest rates; instead sanctions are forcing the central bank to raise them.

with Reuters