The Russian central bank tripled interest rates to 150 per cent yesterday in a last-ditch effort to defend the rouble and restore stability to the financial system.
President Boris Yeltsin has summoned his most important economic advisers to an emergency meeting in the Kremlin today to fight off one of the worst crises Russia's nascent market economy has endured.
The rate rise came in response to turmoil on Russian markets, where share prices fell by more than 10 per cent in the course of the day and yields on treasury bills soared above 80 per cent.
The rouble, rocked by fears of devaluation, edged below the central bank's daily target corridor, but strengthened after the interest rate rise. Shares have fallen 40 per cent since the start of the month and have lost more than half their value since the beginning of the year.
Russian officials, in negotiations with the International Monetary Fund, have raised the possibility of a special fund to defend the rouble. The Kremlin is also hoping the IMF will decide by the end of this week to release a $670 million (£475 million) tranche of Russia's three-year $9.2 billion loan. A senior IMF official is expected to arrive in Moscow for talks today.
Mr Michel Camdessus, the IMF managing director, sought yesterday to calm Russia's troubled markets. "Contrary to what markets and commentators are imagining, this is not a crisis," he said.
Mr Sergei Dubinin, the central bank chairman, said the rate rise was an effort to defend ordinary Russians and to fight off "speculators who hoped to profit from fears of a devaluation. The rise would be a "cold shower" for the overheated market.
The turbulence will test the mettle of Mr Sergei Kiriyenko, Russia's new prime minister, whose team has already suffered one setback this week when it failed on Tuesday to find a buyer for Rosneft, the largest Russian oil company still to be privatised. That may have helped trigger yesterday's turmoil by depriving the treasury of the $2.1 billion it had expected to make from the sale.
The frantic selling followed weeks of steady deterioration of the Russian financial system. Last week Russian equities shed more than 11 per cent in a day, prompting the central bank to raise interest rates from 30 to 50 per cent.
Investor concern has focused on Russia's public finances, particularly its inability to boost tax collection. After gradually improving in the first quarter of the year, tax revenues fell last month and are expected to be poor this month as well. Russia's woes have been heightened by falling international prices for oil, a major export earner.
"The central bank had one single purpose - to give a strong signal to the markets that they will not be dissuaded from defending the rouble, even at the cost of horrific interest rates," said Mr Martin Diggle at Moscow brokerage Brunswick Warburg.
