Russian Central Bank sees risk from oil

Key rate unchanged at 11 percent, though bank sees lingering risk of a recession.

By Daniel J. Graeber

MOSCOW, Jan. 29 (UPI) -- The Central Bank of Russia said it was keeping its key rate unchanged, saying lower crude oil prices could lead to an accelerated rate of inflation.

The Bank of Russia said it was maintaining its interest rate at 11 percent, citing potential for further pressure on inflation and currency valuations. Citing oil prices as a risk factor, the bank said negative pressure was sustained by an over-supplied market and slowing in the Chinese economy.


"This, in its turn, caused the national currencies to weaken and asset prices to drop in emerging markets, affecting Russia," the bank said.

The Russian economy depends heavily on crude oil and natural gas exports, leaving the budget under pressure in the market downturn. Russian President Vladimir Putin has suggested oil priced at $50 per barrel may trigger a recovery in the economy, a price point that's about 40 percent above the current level.

Russian media reports Thursday suggested the Kremlin was in talks with members of the Organization of Petroleum Exporting Countries to cut production in an effort to stimulate oil prices. Oil prices surged more than 5 percent in early Thursday trading, but settled down after OPEC denied the rumors.


A research note from RBC Capital Markets finds the reports may be part of a back-door move to manipulate the markets in Russia's favor.

"An underhanded way that Putin can score the biggest bang for his buck while not alienating his oil patch allies would be to rhetorically agree to a coordinated cut to feed the media headline, while negotiating with domestic companies to simply let decline rates run their course," the note read.

The Central Bank said market conditions are likely to deteriorate further and possibly require it to tighten its monetary policies. Inflation is expected to move from around 10 percent to 7 percent, but risks to the downward trajectory remain.

For oil prices, the bank said it expected the current climate to persist and present a drag on growth in growth domestic product.

"The key rate decision has been made in recognition of the current economic situation, with elevated risks of continued recession provoked by falling oil prices," it said in its rate decision.

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