Russia's currency won't stop falling

LONDON (CNNMoney)

The ruble is hitting record lows against the dollar after falling by about 30% since the start of the year.

It plunged by about 10% this week alone, after the Russian central bank said it would reduce its support for the currency, allowing the ruble to trade more freely.

"The ruble was always likely to fall following the decision by the central bank earlier this week," said Neil Shearing, chief emerging markets economist at Capital Economics. "But the scale of the fall is likely to have set alarm bells ringing among policymakers."

Pressure on Putin is mounting as tumbling oil prices, a sanctions stand-off with the West and continued tensions with Ukraine weigh heavily on the currency.

This year's dramatic devaluation creates problems for Russian consumers and companies since it becomes far more expensive to import goods, and to pay off debts denominated in foreign currencies.

Inflation in the country is running well above 8%, and the central bank warned that it doesn't expect the outlook for prices to improve significantly anytime soon.

Related: Oil trades at $80, but Russia is budgeting for $100

It has been jacking up interest rates all year -- most recently last week when it raised the key borrowing rate to 9.5% from 8% -- but with little effect.

"We suspect that another large increase in interest rates may be needed to stabilize the ruble," said Shearing, adding rates may have to rise to about 12%.

A move of that magnitude would further depress Russia's stagnant economy, and alone may not do the trick. The central bank could be forced to spend billions of dollars more from its reserves to buy rubles.

Related: Norway's new banknotes are art

First Published: November 7, 2014: 8:55 AM ET

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