Russian Rate Cut Weakens Ruble Further

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By Jacob Maslow

Russian Money Background. Rubles Banknotes And Coins
Russian Money Background. Rubles Banknotes And Coins

The Russian ruble is under a lot of pressure. Thanks to the decline in oil prices, the value of the Russian ruble has crashed through the floor. Russia, after all, is a monoculture for all intents and purposes. The vast majority of its national income is derived from energy exports. Whether we are talking about natural gas or petroleum, Russia is dependent on its energy sector to keep the country afloat. This is obvious. Not surprisingly, the Russian currency is taking a beating in the foreign exchange market due to the fundamental weakness and vulnerability of the Russian economy as a whole.

Given this climate, you would think that the Russian central bank would keep interest rates high, or maybe even increase interest rates to make the Russian ruble more attractive. It has made that decision before. Usually, when a central bank increases interest rates, investors would scoop up that central bank’s currency, because it is paying a better rate than the currency of other banks that have higher rates. However, interest rate hikes do tend to put a brake on economic activity. When you hike up interest rates, it is more expensive for businesses to borrow money from the bank. Naturally, this makes businesses hire less people, buy less equipment, and engage in less economic activity. The reverse is true when you cut rates.

It appears that Russia’s economic planners are caught between a rock and a hard place. By cutting rates, this signals to the broader Russian economy that the government is trying to support business activities by making it less expensive to do business. Whether this rate cut would produce the intended effect or have much of an effect at all is anyone’s guess. The ruble’s biggest problem is not interest rates. The Russian economy’s biggest problem is the fact that the price of oil has sunk by more than 50%.

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