The Central Bank of Russia has been forced to intervene in the foreign exchange market today to stem the decline of the Russian ruble, which tanked Monday following an escalation of military tensions on the border between Ukraine and Russia over the weekend.
According to a trader at ING cited by Bloomberg News, the central bank sold more than $10 billion of its dollar reserves this morning in exchange for rubles in the open market in order to prop up the value of the ruble. The IMF estimates that at the end of January, Russia's stock of foreign reserves totaled $457.2 billion.
Basically, when a central bank wants to prop up its currency, it dips into its foreign exchange cashpile and buys its own currency on the open market.
The central bank also unexpectedly hiked its key benchmark policy interest rate to 7% from 5.5% in an effort to stem the ruble's decline.
The dollar is still up 1.4% today against the ruble, but the Russian currency has pared losses from earlier this morning, when the dollar was up even more.
The latest decline in the ruble on the back of escalating military tensions pushes the ruble into territory that the Central Bank of Russia can no longer ignore, given its effect on inflation.
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