The Russian Central Bank responded resolutely to the panic selling of the ruble. But a base rate of 17 percent won't help much unless there is a drastic change in Kremlin policy, says Andrey Gurkov.

Deep recession is now unavoidable

The extraordinary increase in the cost of loans is intended to nip in the bud the panic that could quickly lead to a collapse of Russia's entire financial system. It is also intended to curb swiftly-rising inflation. The step will, after all, lead to a significant rise in interest rates on savings. That should encourage Russians to keep their money in the bank, rather than blowing their rubles on purchases simply because they fear the value of their savings is going to drop still further.

At the same time, the stricter monetary policy will definitively stifle the country's economic growth, which has already been petering out for the past year. Loans, which are already expensive, will now become staggeringly so. However, if no investment funds are available you can forget about investment activity – and with it an upturn in the domestic economy.

The high consumption of recent years will also nosedive, which will help a little to lift inflationary pressure off the ruble. All those who have debts will be hit particularly hard, because they will need to keep taking out new loans to keep up with the old ones. Russia cannot now avoid a deep recession with an increase in unpaid debts, insolvencies of companies and banks, increased unemployment and falling wages in 2015.

Senior civil servant sounds the alarm

If Elvira Nabiullina is consciously willing to take all of this into account, this indicates that the situation regarding the ruble and inflation is so serious that big and very painful sacrifices are unavoidable in order to stabilize the country's financial foundation. The head of the Central Bank is the first such high-ranking official in Russia to give more or less official notice of this. The base rate of 17 percent is her alarm signal, her outcry, and her demand for immediate action.

By doing this Nabiullina has made her specific contribution to overcoming the crisis. And she should be given great credit for this in particular: She is relying on economic, market-based methods to resolve the problem. Now it is the turn of others – the president, the government and the members of parliament. They are being asked to make a radical departure from their previous political and economic course, because in just a few months it has so aggravated the chronic problems of this large country – which, on the whole, was developing reasonably well – that the entire financial system has been shaken.

The financial markets are prepared to believe Nabiullina, as was shown by the distinct stabilization of the rouble on the morning of 16 December. But the market players don't believe that the Russian political elite and President Vladimir Putin are capable of making the necessary radical changes in foreign, domestic and economic policy. They don't believe that the Kremlin is prepared to end its military escapade in eastern Ukraine – which is an essential condition for effectively easing the pressure of Western economic sanctions. They don't believe that Moscow will seriously start to improve the investment climate in order to attract foreign investors. Or that it will start to fight corruption, modernize the economy, which is drastically dependent on the global market price for oil, or to diversify and break monopolies.

This is why, just a few hours after the Russian Central Bank brought out its biggest guns and deployed most of its powder, the ruble resumed its slide against the dollar and the euro. Sooner or later Russia will have to start making radical reforms – and the cost of doing this will rise with every day they are put off.