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MW: Russia raises key interest rate to 17%
 
MOSCOW--Russia's central bank, in a bid to stem a sharp decline of the ruble, raised its key interest rate Tuesday to 17% from 10.5%.

In a statement published after midnight Moscow time, the Bank of Russia said it also is raising its repo rate to 18% from 11.5% and increasing the volume of foreign currency it offers banks at the repo auctions to $5 billion from $1.5 billion.

The bank was criticized for a lack of action Monday when the ruble lost more than a 10th of its value against the dollar in the sharpest daily drop in more than a decade. The bank raised the rate by 100 basis points on Thursday, which failed to put a stop to the ruble's decline.

In its statement, the central bank said it is raising the key rate by 650 basis points as it needs to "limit devaluation and inflation risks, which have risen seriously" recently.

In a separate statement, the bank said it is fixing the rate for infrastructure-project loans at 9%, 800 basis points below the key rate.

The ruble's drop Monday--the largest in a single day since 1999--brings the slump to nearly half since the start of the year and more than one-fifth this month. As the ruble fell, Russia's central bank said the economy could shrink by as much as 4.7% next year if oil averages $60 a barrel, not far below the current price of Brent crude, the global benchmark.

The currency's dive and forecasts of heightened economic pain raise the stakes for President Vladimir Putin, who is locked in a confrontation with the West over his intervention in Ukraine.

The Kremlin's options for stemming the slide are narrowing. Earlier this year, the central bank sold nearly $75 billion to prop up the ruble, but with little effect. It allowed the currency to float freely in November, and has spent some $6 billion since then.

The central bank had been shying away from large-scale interest-rate increases, which have the potential to cripple the economy.

On Monday, before the rate increases, traders and analysts said they were struggling to comprehend the strategy of the central bank, which has more than $400 billion in foreign reserves. Analysts say the money has the potential to protect Russia from a full-blown financial crisis.

The bank on Monday reiterated its view that the ruble is undervalued by as much as one-fifth, saying the currency will recover once the price of oil stabilizes. Officials have blamed speculators for the ruble's plunge.

Timothy Ash, an analyst at Standard Bank in London, said there was a risk that the population might panic, pulling deposits from Russian banks, although there were no signs of that in Moscow on Monday evening.

Hit by capital flight, a sluggish economic performance and Western sanctions over Ukraine, the ruble has been depreciating steadily in the second half of this year. In January, one dollar bought 33 rubles. A rapid drop in oil prices, which started in September, boosted the trend and sent the ruble to record lows.

Some lawmakers have called for the government to impose capital controls, limiting the ability of companies and individuals to take money out of the country, but government officials have ruled out that possibility. Monday, the bank increased its forecast of the net amount of capital that is expected to leave Russia this year to $134 billion, from $128 billion in November.

Capital controls likely would be an instrument of last resort, given the risk of undermining investors' confidence in Russia, said Phoenix Kalen, emerging-markets strategist at Société Générale SA.

"The question is whether that commitment to uphold market legitimacy can withstand both the geopolitical crisis and the collapse in oil prices," the strategist said.

Surveys show Russians are increasingly nervous about the ruble's slide, but there are few signs of protest. Mr. Putin's approval rating remains at more than 70%, after a spike upward earlier this year when Russia annexed Ukraine's Crimea peninsula. He has no domestic political rivals, and street protests against his rule in 2011 petered out.

Poorer people--Mr. Putin's political base--spend mostly in rubles and don't have large savings or take vacations abroad, so they are somewhat insulated from the ruble's weakness. Retailers are phasing in price changes to try to shield consumers from rapid rises.

"It's all not so shocking. Part of society thinks that the president has foreseen everything and will save" the situation, said Alexei Makarenko, a political analyst at the Center for Political Technologies, a Moscow think tank. "Another part thinks, 'It's bad, of course, but what can you do?' "

There was no comment from the Kremlin on Monday. The presidential website published a transcript of a meeting between Mr. Putin and his minister for housing.

Russian state television has largely ignored the ruble's decline. Monday night's main newscast on the Rossiya-1 channel had no mention of the record-breaking plunge even as the decline continued during the program. Weekend news programs focused on the reported success of the government's efforts to control rising prices.

Monday, the dollar rose to a record high of 66.2 rubles in trading after the market officially closed, before pulling back slightly. Trading volumes were low because many investors are hanging back.

Russian authorities, including Mr. Putin, have vowed to stamp out speculative activity they say is behind the ruble's decline. The central bank, which acts as the country's financial markets regulator, on Monday ordered the Moscow stock exchange to stop trading in some derivatives for certain clients, citing "possible market manipulations."

Moscow's dollar-denominated RTS Index was down 10% Monday, while the ruble-denominated Micex lost 2.4%.

Write to Alexander Kolyandr at alexander.kolyandr@wsj.com, Andrey Ostroukh at andrey.ostroukh@wsj.com and Chiara Albanese at chiara.albanese@wsj.com
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