Russia hikes rates, introduces capital controls to defend against sanctions

Russia’s central bank more than doubled its key policy rate on Monday and introduced some capital controls as it scrambled to shield the economy from unprecedented Western sanctions that sent the rouble tumbling to record lows.

The main interest rate will rise to 20%, its highest this century, from 9.5% to counter the risks of the rouble’s rapid depreciation and higher inflation, which threaten Russians’ savings.

“External conditions for the Russian economy have drastically changed,” the central bank said, adding that the hike ‘will ensure a rise in deposit rates to levels needed to compensate for the increased depreciation and inflation risk”.

The monetary authority also ordered companies to sell 80% of their foreign currency revenues, increased the range of securities that can be used as collateral to get loans and temporarily banned Russian brokers from selling securities held by foreigners. It did not specify which securities the ban applies to.

Bank of Russia Governor Elvira Nabiullina will hold a briefing at 1300 GMT.

The emergency measures put the central bank on the frontline defending Russia against a campaign by Western allies to isolate it economically following Moscow’s invasion of Ukraine.

The central bank has itself been targeted, with the West seeking to restrict its ability to deploy $640 billion of forex and gold reserves and cut Russia’s major banks off the SWIFT financial network.

Britain on Monday banned any transactions with the Russian central bank, finance ministry and wealth fund, and said it would prevent Russian companies from issuing transferable securities and money market instruments in the United Kingdom.

Monday’s steps by the Russian central bank bolster other measures announced on Sunday, including an assurance that the central bank would resume buying gold on the domestic market. It will also launch a repurchase auction with no limits and ease restrictions on banks’ open foreign currency positions.

RUN ON BANKS?

The West’s sanctions are likely to deal a devastating blow to the Russian economy and make it hard for banks and companies to access the international financial system. The rouble plunged nearly 30% to an all-time low versus the dollar on Monday.

Russians queued outside ATMs on Sunday, worried the sanctions could trigger cash shortages and disrupt payments.

“A bank run has already started in Russia over the weekend … and inflation will immediately spike massively, and the Russian banking system is likely to be in trouble,” said Jeffrey Halley, Asia-based senior market analyst at OANDA.

Nomura analysts said in a note to clients that fresh reprisal measures by the West against Russia were likely to have wider global implications.

“These sanctions from the West are likely to eventually hurt trade flows out of Russia (around 80% of FX transactions handled by Russian financial institutions are denominated in USD), which will also hurt the growth outlook of Russia’s key trading partners including Europe and lead to greater inflationary pressures and risk of stagflation, we think,” they wrote.

Energy major BP (LON:BP) opened a new front in the West’s campaign to isolate Russia’s economy.

Its decision to abandon its stake in state oil company Rosneft at a cost of up to $25 billion is the most aggressive move yet by a company in response to Russia’s actions in Ukraine, which Moscow calls a “special operation”.

The Russian business operations of other Western corporations are also in the spotlight.

Several European subsidiaries of Sberbank Russia, majority-owned by the Russian government, are failing or likely to fail due to the reputational cost of the war in Ukraine, the European Central Bank, the lenders’ supervisor, said on Monday.

FINANCIAL STABILITY

The Russian central bank in several announcements on Sunday sought to ensure financial stability. It said it would resume buying gold on the domestic market from Feb. 28.

Customers of sanctioned banks would be unable to use their bank cards outside Russia, it said, and cards issued by the sanctioned banks would not work on Google (NASDAQ:GOOGL) Pay or Apple (NASDAQ:AAPL) Pay.

It also ordered market players to reject attempts by foreign clients to sell Russian securities, a document showed.

That could complicate plans by the sovereign wealth funds of Norway and Australia to wind down exposure to Russian-listed companies.

In a bid to inject cash into the financial system, the central bank said there would be no limit at a “fine-tuning” repo auction it will hold on Monday.

It said the banking system remained stable, with bank cards working as normal and customers able to access their funds.

The central bank said it would substantially increase the range of securities that can be used as collateral to get central bank loans and temporarily ease restrictions on banks’ open foreign currency positions after the sanctions.

The measure, allowing banks suffering from “external circumstances” to keep positions above the official limits, will be in place until July 1, it said in a statement.

The central bank will continue to monitor changes in currency positions “in order to guarantee the normal functioning of the currency and money markets and the financial stability of lending institutions”, it said.