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Friday, December 26, 2014 2:07 PM

Russia's Overnight Lending Rate Hits 19%, as Mistrust of Banks Spreads; Ruble Up Again

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In Russia, the overnight lending rates between banks has soared to 19%, a sign of widespread and warranted mistrust between banks, as one bank has failed. To stabilize the situation, Putin is considering bank deposit insurance up to an amount equivalent rate of about $26,000.

Meanwhile, and although Russia is still burning through currency reserves, the value of the Ruble has been rising.

CNN Money reports Russia Empties the Vault to Prop Up Ruble.

So far this year the central bank has burned through more than $110 billion in foreign currency supplies. That's more than a quarter of what it has in reserves right now.

Spending has ramped up in the last few weeks. Since the start of December, the central bank has blown through more than $21 billion.

That, along with a series of other measures to support the banking sector, has helped to stabilize the ruble.

[Mish comment: Actually, blowing through reserves is destabilizing, but other measures such as the huge hike in interest rates is indeed stabilizing]

Russia is working on a plan to pump one trillion rubles ($18.6 billion) into Russian banks next year, and wants to establish deposit insurance to guarantee savings up to 1.4 million rubles ($26,000).

The ruble climbed nearly 6% against the U.S. dollar on Friday.

Still, Sberbank CIB chief economist Evgeny Gavrilenkov said the central bank's strategy of spending down foreign reserves was "not ideal," and pointed to stresses elsewhere in the financial sector.

[Mish Comment: Once again, I highly doubt the "strategy" is to spend foreign reserves to prop up the ruble. Rather, spending of foreign currency reserves is needed due to declining oil revenues. I suspect there are some seasonal influences in play as well.]

"The liabilities of banks and servicing [refinancing] debt is very costly now, so the banking system is vulnerable," he said.

Last week a local bank collapsed, and the rates Russia banks lend to each other have jumped. Overnight rates are now nearly 19%, indicating just how serious the funding crisis has become.
Spotlight on the Ruble

The Ruble is up from 79.917-per-US$ to 53.911-per-US$ since December 15 when I reported Moscow Hikes Interest Rates to 17% from 10.5% in Emergency Middle-of-Night Action.

That is a rise of about 48%. And hiking rates is how you stabilize a currency.

Deposit insurance, although I fundamentally disagree with it, should also stabilize things. All that remains is for Russia to stop the hemorrhaging foreign reserves and for oil to stabilize. Both will eventually happen.

I like the Ruble here and the Russia stock market as well.

Mike "Mish" Shedlock

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