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Russian Interest Rate Hike

James Boston
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Russian Interest Rate Hike

The Bank of Russia has just announced an increase in it’s base interest rate. In a surprise move the rate was hiked from 7.5% to 8.0% at this mornings monetary policy meeting. Markets had forecast no further monetary tightening this month.

Despite the fact that economic growth is holding up, for now at least, the Russian economy is facing some tough challenges ahead. Clearly there is yet to be any acceptance of blame or formal proof that Russia was at least in part responsible for the latest Malaysian Airlines tragedy, rhetoric from world leaders however would imply that the current circumstantial evidence puts the Russian backed separatists directly in the frame.

It will probably be weeks if not months before any formal investigations into this incident will be completed, there will then follow some significant economic sanctions against Russia if involvement is proven and the conflict in the Ukraine is ongoing. The sanctions that have been imposed to date, primarily by the US, have caused some difficulties for the Russian President, Vladimir Putin, as many wealthy Russians have had their international assets frozen. To date Putin has been able to withstand political pressure as his annexation of Crimea brought his popularity level with ordinary Russians to an all time high.

A significant ramping up of economic sanctions however will cause major problems for an already struggling Russian economy. The European Union has not shown it’s hand yet but it will most certainly not have the option of a soft response to Russia. With the sanctions against the country being imposed globally it is likely that entire sectors of the fragile Russian economy will be affected and not just a few of President Putin’s close allies. The destabilizing effect that this would have on an economy, which is already starved of investment, is likely to be immense.

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