Hole in the water

Russian central bank chooses banks over rouble

The Central Bank of Russia (CBR) is more concerned about the state of the economy than the value of the rouble. That is the meaning of its surprise January 30 decision to cut its main policy interest rate by 2 percentage points. The central bank admits that the decision aims to avert a "sizeable decline in economic activity." The risk is that hesitation between the economy and the currency might provide Russia with the worst of both worlds: inflation and recession.

The rouble had continued to slide even after the CBR pushed its central policy rate to a punishing 17 per cent in December. The debacle caused by falling oil prices and Western sanctions puts the central bank in an unenviable position. It is forced to fight a crisis whose causes it does not control with policies whose consequences it cannot predict. With oil prices anchored below $50 a barrel and renewed Russian-supported military activity in eastern Ukraine, there is no reason for the rouble - down 16 per cent in January after a 40 per cent fall in 2014 - to stabilise in the near term.

The latest rate decision may at least give the banking sector a needed breather. Banks are caught between the rock of bad loans and the hard place of sanctions, which have restricted their access to foreign currency funding. Two-thirds of a $34 billion "anti-crisis plan" announced this week by the Russian government is geared towards shoring up the banking sector. However, a plan to hive off dodgy assets in a "bad bank" sounds like wishful thinking, if only because these assets are almost impossible to price: banks have been allowed to skirt mark-to-market rules, freezing valuations to their third-quarter levels.

As long as Russia remains isolated and oil-dependent, its currency and economy will keep sliding. Its government can do no more than shift roubles around to plug the latest holes. With such an ally in such a situation, the central bank can only choose among equally bad policies.