Russian Central Bank Lowers Interest Rate as Fear Mounts over Recession Caused by Oil Prices, Western Sanctions

( [email protected] ) Jan 30, 2015 05:43 PM EST
Russia's central bank cut its key interest rate to 15 percent on Friday, just one month after a hike, as fear mounts over a recession caused by a fall in oil prices and Western sanctions.
Russia's central bank cut on Friday its main interest rate to 15 per cent from 17 per cent in a move that caught markets by surprise, sending the ruble tumbling.

In an unexpected move, Russia's central bank cut its main interest rate to 15% on Friday, as nationwide fear mounts over a recession caused in part by a fall in global oil prices and  sanctions from the West over its actions in Ukraine.

Reuters reports that the bank reduced the rate just after pushing it up by 6.5 points to 17 percent in attempt to stop a drastic slide in its ruble currency, which has lost half of its value in recent months due to plummeting oil prices.

"Today's decision to lower key interest rate by 2 percentage points is intended to balance the goal of curbing inflation and restore economic growth," the bank's governor, Elvira Nabiullina, said, adding that the rate remains high enough to allow the bank to reach its inflation target in the medium term.

Russian President Vladimir Putin did not comment on the situation and the Kremlin denies influencing central bank decisions. However, Finance Minister Anton Siluanov said the decision appears to be "politically driven."

"It is a cut that shows the central bank is worried about the risks to the banking sector. It looks like the central bank's hand has been forced," Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, told Reuters.

According to the Wall Street Journal, the surprising policy shift likely reflects the Russian government's realization that the future of the economy is bleak due to plummeting oil prices and escalating violence in Ukraine, which has prompted Europe, the U.S. and Canada to threaten increased sanctions against the country.

"The impact that we've seen on the Russian economy just in the last year I think is testament to the fact that by working in coordinated fashion, we have forced the Russian regime to encounter some costs as it relates to their policy in Ukraine; that if they're going to violate this core international principle about the sovereignty and integrity -- territorial integrity of their neighbors, that there are going to be economic costs associated with that," U.S. Press Secretary Josh Earnest said during a press conference on Friday.  

"The United States is extremely concerned about Russia's continued provocation in Ukraine."

Andrey Kostin, chief executive of VTB Bank, warned that sanctions are the "wrong way to treat Russia" and predicts that they will lead to less stability in Europe.

"We have quite a strong opinion on sanctions. Sanctions, in other words, are economic war against Russia," he told CNBC.

"Economic war will definitely have negative implications for the Russian economy, but more than that it will have very negative implications for political dialogue and security in Europe. And who wants to live in a less secure world?"