Australian dollar hit as Russian economic crisis erupts

THE dollar was last night sucked into the downdraft of the collapsing rouble as fears spread Russia could dump commodities.

Supplied Editorial Rouble

THE Australian dollar was last night sucked into the downdraft of the collapsing rouble as fears spread that Russia could dump a slew of commodities including gold on to global markets in a bid to raise the hard currency it needs to shore up its finances.

In an unusually sharp decline for local trading, the dollar lost almost one US cent, hitting a 4½-year low of US81.45c.

Russian markets have taken a battering as Moscow’s emergency interest rate rise failed to steady the rouble, instead prompting traders to hit the panic button.

Brent crude, the global benchmark for oil, has fallen almost 50 per cent in the past six months, slashing the income of oil-producing nations, and increasing the risk of default for oil-rich ­Russia. Last night, Brent was trading at a five-year low of $US59.91 a barrel.

The Russian central bank raised rates from 10.5 per cent to 17 per cent overnight on Tuesday to protect the flailing currency. After a 10 per cent rally, markets turned and sent the rouble crashing by 25 per cent to a record low of 80.1 to the US dollar. Last night the rouble had clawed back some ground to be trading at 67 to the US dollar.

As the rout continued, Moscow’s benchmark RTS share index collapsed 12.5 per cent, its largest one-day fall in six years. Government borrowing costs rocketed 2 percentage points to 15.36 per cent, higher than in the financial crisis, and the nation’s economy minister was forced to deny that the country was planning to introduce capital controls to prevent damaging investor flight.

“We are in the midst of a full- blown Russian economic crisis caused by the collapse in oil ­prices,” Westpac chief currency strategist Robert Rennie said.

“With industrial commodity prices remaining under pressure this week and the Russian economic crisis causing rising risk aversion, it’s no surprise the Australian dollar remains weak.”

Any moves this morning by the US Federal Reserve to signal that an interest rate rise is likely over the next year will further pressure the Australian dollar.

Russia’s central bank has intervened constantly this week, yet the rouble was still down 20 per cent for the week.

The price of Australia’s major commodity exports — iron ore and coal — are down almost 50 per cent and 30 per cent, respectively, this year, cutting into the nation’s economic growth and increasing the risk of interest rate cuts. Meanwhile, fears are spreading that Russia may begin selling its vast gold stockpile while flooding markets with oil.

Mr Rennie said his short-term target for the dollar was the 2010 low of US80.67c.

Russia has been caught by the twin blows of tumbling oil, the price of which its economy depends on, and painful international sanctions for its involvement in Ukraine. As investors have fled, the currency has collapsed, halving in value in six months and sending inflation soaring to 10 per cent, squeezing living standards.

The central bank explained that it had raised rates so aggressively to “limit the risks of inflation and devaluation”. It also warned that the economy could shrink by as much as 4.7 per cent next year if oil remained at $US60 a barrel.

Risks that Russia’s problems could spill over into other markets are spooking investors, triggering wild volatility and a flight to safety. On Wall Street, the Dow Jones industrial average fell and rose before closing at 17,068.87 points, down 111.97. Australia’s S&P/ASX 200 gave up an early rally, closing 9.6 points higher at 5161.9.

In Britain, the governor of the Bank of England steadied nerves by claiming that Russia’s situation was unique, owing to the combination of sanctions and falling oil. He added that Russia was less ­financially interlinked to other countries than in the 1998 crisis.

The interest rate shift — if it is sustained — will come at considerable cost, raising borrowing costs for businesses and consumers and so applying the brakes more sharply on an economy expected to plunge into recession early next year because of falling oil and gas prices and sanctions.

Because of the plunging rouble, foreign investors in Russian companies have lost more than half their money this year.

additional reporting:

The Times