Russia said on Thursday its currency crisis was over, even though its forex reserves have plunged and annual inflation has climbed above 10 percent, adding to the problems facing the government as it fights its worst economic crisis since 1998.
The ruble plunged to all-time lows last week on heavy falls in the price of oil, the backbone of the Russian economy, and Western sanctions over the Ukraine crisis that made it near impossible for Russian firms to borrow on Western markets.
However, it has since rebounded sharply after authorities took steps to halt its slide and bring down inflation, which after years of stability threatens Russian President Vladimir Putin’s reputation for ensuring the country’s prosperity.
Those measures included a hike in interest rates to 17 percent from 10.5 percent, curbs on grain exports and informal capital controls.
“The key rate was raised in order to stabilize the situation on the currency market... That period has already, in our opinion, passed. The ruble is now strengthening,” Russian Minister of Finance Anton Siluanov told the upper house of parliament on Thursday.
He added that interest rates would be lowered if the situation remained stable.
Standard & Poor’s credit ratings agency said this week it could downgrade Russia to junk as soon as next month due to a rapid deterioration in “monetary flexibility.”
Keen to avert a downgrade, Russia said it had started talks with ratings agencies to explain the government’s actions.
Siluanov said the budget deficit next year would be “significantly more” than the 0.6 percent of GDP originally planned.
The ruble slumped to 80 per US dollar in the middle of this month from an average of 30 to 35 in the first half of the year. It has strengthened in the past few days to trade as strong as 52 per US dollar on Thursday, in part thanks to government pressure on exporters to sell hard currency.
Last week, Russia’s gold and foreign currency reserves dropped by as much as US$15.7 billion to below US$400 billion for the first time since August 2009 and down from more than US$510 billion at the start of the year.
Analysts said about US$5 billion were spent on propping up the ruble, while about US$7 billion was due to foreign currency loaned to banks as part of repo operations, meaning the money will be returned to the regulator at a later stage.
Russia imports large amounts of food, high-tech equipment and cars. As the ruble weakens it has to pay more for its imports, which pushes up inflation at home and in turn encourages people to protect their earnings by buying US dollars, thereby adding to the pressure on the ruble.
Putin’s economic aide Andrey Belousov said on Thursday that annual inflation was at 10.4 percent and could reach about 11 percent by the end of the month, surpassing the psychologically key 10 percent mark for the first time since the 2008 -2009 global financial crisis.
Prices for some goods, such as beef and fish, have risen 40 to 50 percent in recent months after Russia slapped an import ban on certain Western food products in retaliation for EU and US sanctions over Ukraine.
Bank officials say they saw a spike in withdrawals from ruble deposits in the middle of this month as Russians rushed to convert their savings into hard currencies.
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