Russia's economy teeters as rouble collapses

See also: Analysis: A Russian collapse was only a matter of time

A combustible mix of falling oil prices, sanctions and structural economic problems have caused turmoil in the Russian economic system today.

Russia’s economy appears to be in tatters when a steep decline in the rouble caused the Central Bank of Russia (CBR) to lift its interest rate from 6.5% to 17% on Tuesday night. This was the highest increase since 1998.

The interest rate lift was an attempt to stop the decline, but the country’s currency still collapsed by more than 20% in a few hours as investors interpreted the move as panic.å

The interest rate hike marks the sixth time the central bank increased its rates in 2014.

CBR’s first deputy chairman Sergei Shvestsov says the rouble is in a critical condition and the bank will react with additional measures soon.

“We could not imagine this in our worst nightmare a year ago,” he says.

Mr Shvetsov says he is optimistic Russia will survive the crisis but has told reporters the situation is comparable to the worst period of 2008.

It is as yet unclear why the CBR raised interest prices so drastically but Russia’s financial problems come as the global price of oil dipped yesterday below $US60 for the first time since 2000.

Russia has pegged its national budget on a price of oil north of $US100 and has been hit hard by volatile oil prices. The 49% drop in oil prices this year appears to be having a larger impact than the Western sanctions, though both are compounding the country’s woes.

Speaking at a press conference in London today, US Secretary of State John Kerry said steps could be taken to lift sanctions on the country if Russia lived up to its commitments under ceasefire accords to end the Ukraine conflict.

Mr Kerry says Russia has made “constructive moves” in the past couple of days over the conflict in Ukraine. The sanctions were in place to persuade Russia to stop interfering in Ukraine, not hurt the Russian people.

“These sanctions could be lifted in a matter of weeks or days, depending on the choices that President Putin takes.

"Their sole purpose here is to restore the international norm with respect to behaviour between nations,” Mr Kerry says.

At another press conference later in the day, Russian Foreign Minister Sergei Lavrov said there was serious reason to believe Western sanctions were aimed at “regime change” in Moscow.

Council on Foreign Relations president Richard Haass says the Russian central bank and President Vladimir Putin have “few tools” to stabilise the economy.

“After you raise interest rates by 6-1/2%, you begin to run out of things to do domestically,” Mr Haass says.

nsmith@nbr.co.nz