Jacking the Rates

Capital flight is becoming a very big problem in Russia these days, and has sparked some very high level intervention and official warnings. This bit comes from the Wall Street Journal MarketBeat blog:

Officials in the country, in an attempt to defend the falling ruble and maintain some capital flows, raised interest rates overnight by a full percentage point to 12%, as it deals with declining foreign currency reserves, capital outflows and short-term debt issues among some of the nation’s largest investors. Is raising rates a smart decision? The rationale behind it would be to attempt to prop up the currency, which is declining in part because of the rapid slide in oil prices, which has caused investors to worry about the country’s capital and current-account positions, which until recently had been quite strong.

But the country has spent tons trying to defend its currency — total reserves have fallen to $487 billion, down from $598 billion in August — and some believe it could sport a current-account deficit before long if capital continues to flow in the wrong direction. Many believe this is a waste of money. “In the last couple of years oil prices were surging, and so, sure, the ruble surging, but naturally now currency is going to depreciate, and it’s crazy to try to resist it,” says Win Thin, emerging-markets strategist at Brown Brothers Harriman.In a sense, the Russian moves may have made things worse, worrying investors with what Mr. Thin called its “clumsy” response. The country’s credit-default swaps, a measure of insurance against debt default, reflect a cost of $750,000 to insure $10 million in bonds against default for five years, up from $625,000 Tuesday, according to Phoenix Partners Group. Investors have become more risk-averse as it comes to Russia, and the reduction in liquidity has crimped issuers of debt in Russia, who — like U.S. banks — are finding it difficult to roll over short-term debt.