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Russian financial crisis threatens as huge interest rate hike fails to help tumbling rouble

Russian financial crisis threatens as huge interest rate hike fails to help tumbling rouble
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A massive 6.5 interest rate hike by Russia’s central bank has failed to halt the rouble’s slide.

The currency plunged further against the dollar and the euro on Tuesday, suffering its steepest fall in a single day since the country’s financial crisis in 1998.

Faced with slumping oil prices and Western sanctions over Ukraine, the central bank appeared powerless.

Governor Elvira Nabiullina said: “Recently we’ve seen a sharp drop in the value of the national currency, the main reasons for which include a drop in the oil price and the lack of possibility for our banks to ask for international banks’ financing.”

She insisted the rouble is “undervalued” considering the state of Russia’s economy and it has been “oversold”. But the financial markets ignored her comments and the hike, less than a week after another 1.0 percent rise, was seen as a sign of desperation by the bank.

The rouble’s weakness and high interest rates are a major problem for President Putin as that stokes inflation and will choke off economic growth, undermining his promises to the Russia people of prosperity and stability.

Russia’s economy is very dependent on oil as about half the budget comes from taxes on oil and natural gas producers and it is estimated as much as a quarter of gross domestic product is linked to the energy industry.

As the rouble fell, crude oil also slid further, at one stage going below $60 a barrel.

Asked about the collapse of the Russian rouble, US Secretary of State John Kerry said: “There are a lot of combined factors, but the sanctions were clearly intended to invite President Putin to make a different set of choices.”

He pointed out the collapse of the currency was not only due to sanctions but also reflected other factors such as the fall in oil prices.

Kerry said none of the measures taken against Russia were targeted at hurting the Russian people but “they are caught up in choices that their government makes and it does have an impact”.