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Russia raises interest rates, applies capital controls as sanctions

A view showing the Central Bank of Russia headquarters in Moscow
FILE PHOTO: An exterior view shows the Central Bank of Russia headquarters in Moscow, Russia March 29, 2021. A sign reads: “Bank of Russia”. REUTERS / Maxim Shemetov

February 28, 2022

(Reuters) – Russia’s central bank more than doubled its key policy rate on Monday and introduced several capital controls as the country faces deepening economic isolation , but their governor said sanctions have prevented them from selling foreign currency to boost the ruble’s price.

The recognition that restrictions have effectively tied the hands of the Bank of Russia underlines the ferocity of the backlash to Moscow’s invasion of Ukraine and the success of its Western allies in limiting it. limited the ability to deploy about $640 billion in foreign exchange and gold reserves.

Governor Elvira Nabiullina said in a press conference: “The central bank today raised the key rate by 20% due to the new sanctions causing a significant disparity in the ruble rate and restrictions. central bank options in the use of gold and foreign exchange reserves,” Governor Elvira Nabiullina told a news conference.

“We had to increase the rate[to]compensate citizens because of increased inflation risks.”

Earlier Western sanctions sent the ruble down nearly 30% to a record low. It regained some ground after the central bank raised its key interest rate to 20%, the highest this century, from 9.5%.

Russia’s central bank sold $1 billion in the foreign exchange market on Thursday, Nabiullina said, but did not intervene on Monday.

“Due to restrictions on the use of our gold and foreign exchange reserves in dollars and euros, we did not initiate interventions today,” said Nabiullina.

That suggests the ruble was backed by other unnamed market participants.

On Monday, the central bank and the finance ministry said they would order export companies, including some of the world’s biggest energy producers from Gazprom to Rosneft, to sell 80% of their foreign exchange revenue. their market share, as is the ability of the central bank itself. money market intervention is restrained.

The United States and Great Britain have banned their citizens or institutions from dealing with Russia’s central bank, the National Financial Fund or the Russian finance ministry.

Switzerland said it would impose European Union sanctions on Russians involved in its invasion of Ukraine and freeze their assets, a big departure from the country’s tradition. create.

CASH DEMAND BILLION

Major Russian banks were also excluded from the SWIFT messaging network that facilitates trillions of dollars in financial transactions worldwide, making it difficult for companies and lenders to make and receive payments .

Nabiullina said Russia already has an internal alternative to SWIFT that foreign partners can connect to, but did not give details.

She said the banking sector faced a “structural deficit in liquidity” due to high cash demand and that the central bank was ready to assist.

“Central banks will have the flexibility to use whatever tools are needed… banks that can afford to raise capital from the central bank,” Nabiullina said.

Russians lined up outside ATMs on Sunday, fearing sanctions could cause cash shortages and disrupt payments.

All banks will fulfill their obligations and the money in their accounts will remain safe, Nabiullina said, although the central bank has advised banks to restructure the loans of some customers. row.

The European Central Bank warned on Monday the European branch of Sberbank, Russia’s largest lender, has failed, the European Central Bank warned on Monday, following a run of money. deposits from this bank due to the backlash from Russia’s invasion of Ukraine. [L8N2V31U9]

Nabiullina said further monetary policy decisions will be driven by central banks’ assessment of external risks, adding that the bank will be flexible in its decisions amid the “non-standard situation” faced by the financial system and the economy.

She was speaking as cease-fire talks between Russian and Ukrainian officials began on the Belarusian border.

The ruble fell about 18% in late afternoon trading. Russia’s stock markets and derivatives markets were closed to counter further losses.

GLOBAL HINT

Nomura analysts said in a note to clients that new Western countermeasures against Russia are likely to have a broader global impact.

“These sanctions from the West have the potential to ultimately hurt trade flows out of Russia (about 80% of foreign exchange transactions handled by Russian financial institutions in USD), which will also affect the growth prospects of Russia’s important trading partners, including Europe, and potential customers. we anticipate greater inflationary pressures and the risk of inflation stagnation,” they wrote.

Announcing the rate hike early Monday, the central bank acknowledged that “external conditions for the Russian economy have changed drastically”.

It also temporarily banned Russian brokers from selling securities held by foreigners, although it did not specify which assets the ban applied to.

Other emergency measures announced on Sunday and Monday include assurances that the central bank will continue to buy gold in the domestic market.

On Monday, it sold 3.04 trillion rubles ($28.3 billion) in a no-holds-barred “refined” repo auction to help banks with liquidity.

Finance Minister Anton Siluanov said the government is ready to strengthen the capital base for commercial banks if required.

An order that Russan’s brokerages deny orders to sell Russian securities from foreign clients could complicate plans by Norwegian and Australian sovereign wealth funds to reduce exposure. with Russian listed companies.

It is also unclear whether energy major BP, Russia’s largest foreign investor, will approve a decision to give up its stake in state oil company Rosneft at a cost of up to $25 billion.

Global bank HSBC and the world’s largest aircraft leasing company AerCap are among other Western companies seeking to pull out of Russia because of their actions in Ukraine, which Moscow calls “special operations”. “.

(With Reuters reporting in Moscow; Editing by Catherine Evans and Carmel Crimmins)

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Caroline Bleakley

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