Russia's central bank raised interest rates by 350 basis points to 12 per cent on Tuesday in an emergency move to try to halt the rouble's recent slide.
On Monday, the currency plunged to a 16-month low, sinking as low as 101 to the dollar, as the war in Ukraine continues to affect Russia's economy.
Data from the Moscow Exchange showed the rouble sharply weakening against the dollar after the rate decision, before settling to trade at around 98.19 just after 1pm local time (2pm Gulf Standard Time).
Since the beginning of the year, the rouble has shed about 26 per cent of its value against the dollar and is now roughly equal to one US cent.
What's behind the rouble's slide?
Russia's economy is struggling with the costs of the war in Ukraine and reduced revenue from oil and gas.
In addition, imports have surged in recent months, creating demand for the dollar and other major currencies, further weakening the rouble.
Timothy Ash, senior strategist at Bluebay Asset Management, said the currency's slide is driven by sanctions and capital flight as Russians look to move their money out of the country.
“In recent months, what we've seen is an oil price cap beginning to work, the erosion of Russia's reserves and generally, sanctions,” he told The National.
“You can import stuff you want, but getting around sanctions costs extra money. So that's all reflected in a current account and trade position that deteriorates and more demand for dollars.”
He added that remittance data showed that wealthier Russians were apparently finding ways to get around sanctions and capital controls.
“Russians have been getting their money out, and that's continued, and headlines about a currency weakness leads to more capital flight,” he explained.
Interest rates likely to rise further
President Vladimir Putin's economic adviser Maxim Oreshkin rebuked the central bank on Monday, blaming what he called its soft monetary policy for weakening the rouble.
Hours after Mr Oreshkin's words, the bank announced the emergency meeting, throwing the currency a lifeline.
“Inflationary pressure is building up,” the bank said in a statement on Tuesday as they said the rate would move from 8.5 per cent to 12 percent.
“The pass-through of the rouble's depreciation to prices is gaining momentum and inflation expectations are on the rise.”
The bank last made an emergency rate hike in late February 2022 with a rate raise to 20 per cent in the immediate fallout of Russia's despatching troops to Ukraine.
The bank then steadily lowered the cost of borrowing to 7.5 per cent as strong inflation pressure eased in the second half of 2022.
The bank is next scheduled to consider its key rate on September 15.
The rouble could sink further to 115 to 120 per dollar, Alor Broker analyst Alexei Antonov warned in a note published earlier by financial firms on Monday,
“For the decline in the rouble to end,” Mr Antonov said, “we need to wait for a reduction in imports or decisive steps by the monetary authorities.”
Mr Ash said that as long as the war continues things will get “worse for Russia, the Russian economy and the rouble.”
“Hiking policy rates won’t solve anything – they might temporarily slow the pace of depreciation of the rouble at the price of slower real GDP growth – unless the core problem, the war and sanctions are resolved.”