Russia's rouble plunged more than 10 per cent today as confidence in the nation's central bank shattered following an ineffectual overnight rate hike from 10.5 to 17 per cent.
Battered by stringent European Union and United States sanctions imposed following the conflict in Ukraine and tumbling oil prices, the rouble's value has dropped by nearly 50 per cent since January.
The sudden depreciation is the most drastic since the Russian financial crisis in 1998 and is pushing inflation to worrying new heights.
In a desperate bid to prevent the collapse of the currency and boost its economy, Russia hiked its benchmark rate last night to 17 per cent.
As a result, the rouble opened this morning approximately 10 per cent stronger against the dollar - but it soon fell to new record lows, pushing losses this year against the dollar to more than 50 per cent.
Russia's currency was last down over 11 per cent at 73 to the dollar after falling past 74 roubles per dollar for the first time. It was more than 15 per cent weaker against the euro at 92.99.
At one point, Russia's dollar-demoninated RTS share index fell nearly 15 per cent, as Russian sovereign dollar bonds fell and money market rates jumped. President Putin has blamed both the slide in oil and the rouble on the West and speculators.
The rouble's fall also reflects falling confidence in the central bank, whose governor Elvira Nabiullina now appears powerless to stop the currency's slide.
So far this year, the central bank has spent over $80billion defending the rouble, including more than $8billion since it floated the rouble last month. Russia's reserves are currently in the range of $416billion.
Tumbling oil prices and Western sanctions imposed on Russia for its role in the Ukraine crisis have been key forces behind the rouble's demise.
The price of Brent crude oil fell by more than a dollar on Monday to below $60 for the first time since July 2009. This is likely to have an impact on Russia's oil-dependent economy, which the central bank says will probably contract early next year. Russian authorities had been banking on oil prices of $100 per barrel in 2015, but are now forecasting a recession if prices remain at current levels.
The sanction effect
EU and US sanctions imposed on Russia in the wake of the crisis in Ukraine means Russian banks and financial institutions are currently frozen out of western capital markets.
One of the sanctions imposed prevents EU nationals and companies from providing loans to five major Russian state-owned banks. Another prohibits services - like brokering - related to the issuing of certain financial instruments.
The sanctions have also had an impact on firms with operations and employees in Russia. Some global law-firms for example have suffered significant headcount drops as Russian-based banking work continues to dry up.
Even Downing Street has waded into the issue, saying that international sanctions against Russia over its destabilisation of Ukraine have left it more vulnerable to economic shocks such as the current slump in oil prices.
The ongoing sanctions will be discussed by EU leaders including David Cameron at a summit of the European Council in Brussels on Thursday.
Asked for David Cameron's assessment of the situation in Russia, his spokesman said: 'What he would say is that it is not unreasonable to look at this in terms of the fact that Russia has made itself more vulnerable to economic shocks that major oil producers may face as a result of the fluctuations in the oil price, as a result of the relative isolation through sanctions that it has faced due to events in Ukraine'.
David Cameron's spokesman rejected any suggestion that the sanctions could be scaled back in response to Russia's economic woes. The spokesman told reporters: 'That requires de-escalation in the Ukraine.
'We have been clear that if Russia continues not to take the path of de-escalation, it will continue to face consequences. These have primarily been through sanctions, which have had an economic focus'.
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