Russia: Central Bank Fears More Shocks as Rouble Falls to New Low

The Russian rouble plummeted to a new multi-year low on Friday as the country is getting more aware of the severe economic challenges ahead even as its tensions with the neighbour Ukraine have started to ease.

The Central Bank of Russia on Thursday told the government that the likelihood of sharp fall in oil prices is a scenario the country should weigh, reported Pravda, Russia's official news agency.

"We cannot continue growing extensively. Growth can only be based on increasing productivity and improving efficiency," said Elvira Nabiullina, the central bank chief, as she was presenting the report on the monetary policy at the government meeting on Thursday.

She said cutting interest rates to boost investment is difficult as inflation is very high. The central bank's inflation targets for 2014 and 2015 are 4.5% and 4.6% while it believes the normal rate for medium term will be 4%. The bank is afraid the targets can't be achieved.

Rouble

USD/RUB rallied to a new multi-year high of 37.98 on Friday, making up the fall in the rouble so far this month to 4.9%.

The Russian currency is headed for its third straight monthly losses and is now down 12.8% since end of June.

In addition to the domestic issues, the broad dollar strength is also weighing on rouble, traders said.

GDP Data

The market is waiting for the August GDP data from Russia later on Friday.

The monthly GDP number averaged 1.04% in the first five months of this year but fell below zero in June and continued there in July too.

The July GDP rate was -0.2%, steeper than the 0.1% contraction recorded for June. The continuation of the trend is expected to further weaken rouble.

World Bank View

The World Bank too calls for structural revival of Russia as according to its analysts, with the current model of broad participation of the State in economic activities the country has achieved maximum level of potential production.

"Returning to the model stipulating aspiration to high rates of economic growth in Russia will depend on the steady growth of private investment and improving consumer confidence," World Bank said.

The baseline scenario of the World Bank assumes that Russia will face stagnation. The projected growth makes up 0.5% in 2014, 0.3% and 0.4% in 2015 and 2016.

The pessimistic scenario envisages growing tensions and, as a consequence, prolonged recession. Compared with 2014, when the growth rate makes up 0.5%, the economy will shrink by 0.9% in 2015 and by 0.4% in 2016.

Impact of Sanctions

The restrictions imposed by the West on Russia in the aftermath of the tensions on its border with Ukraine may considerably decrease foreign reserves of the Russian Central Bank, the bank said.

The level of oil production will drop, and the immunity of the economy against external shocks will weaken. Russia will enter recession this year with a decline of 1%, and 2015 will be marked with stagnation, a recent Moody's report showed.

However, according to the central bank, even if the West toughens sanctions, GDP growth in 2015 will come up to 0.5%, much less than the Economic Development ministry's forecast of 1.2%. The ministry sees 2014 growth at 0.5%.