Sharp rises in interest rates can defend a currency against negative sentiment by hiking the carrying cost of short positions. They cannot alter a currency slide caused by more fundamental factors. For that reason, the Central Bank of Russia’s 650 basis point rate hike in December 2014 seemed to suggest the country is running out of options.
Russian companies have been frozen out of international capital markets by sanctions, and are forced to refinance upcoming maturities on almost $700bn in external debt by borrowing in roubles and then using the proceeds to buy dollars. That weakens the exchange rate. Throw in rising inflation due to Russian restrictions on Western food and pharmaceuticals imports, a Republican-controlled US Congress calling for more sanctions, plus the sudden fall in the price of oil that accounts for much of Russia’s exports and economic output, and you have the fundamental ingredients for a weak rouble.
