Russia hikes interest rates to 20% as rouble dives in value

Western sanctions on reserves prevent further support of rouble, central bank chief says

Russia's central bank more than doubled interest rates on Monday in an attempt to steady the country's financial markets, after unprecedented western sanctions sent the rouble tumbling as much as 29 per cent.

The central bank boosted its main interest rate to 20 per cent from 9.5 per cent in an emergency decision, saying “external conditions for the Russian economy have drastically changed”.

The rouble dropped to almost 118 against the dollar in offshore trading on Monday, according to Bloomberg data, after Russian president Vladimir Putin put his nuclear forces on high alert and the United States, Europe and UK unleashed sanctions aimed at cutting the country off from the global financial system.

The exchange rate later recovered to around 100 in what market participants described as deeply strained trading conditions that make it difficult for foreigners to sell.

Russia's biggest foreign bond, $7 billion (€6.24 billion) in debt maturing in 2047, lost more than half of its value on Monday to reach around 30 cents on the dollar, according to Tradeweb data. Some investors said they saw a possibility that Russia could default on its debt, which has become extremely hard to trade. "If you see a quote on the screen it might be live or it might not," said one. "There's nothing certain in this environment. It's not about fundamentals any more, it's about compliance issues."

Trading suspended

Trading in shares and derivatives on the Moscow Exchange was suspended, Russia’s central bank confirmed on Monday. However, Russia-focused shares traded on other markets around the world dropped heavily.

Global depositary receipts of Russian companies traded in London, such as Sberbank, Lukoil and VTB, remained open. Sberbank, whose European subsidiaries the European Central Bank warned were "failing", plummeted more than 70 per cent, as did TCS Group, which owns Tinkoff.

Moscow is being pushed further to the fringes of world markets. Norway said on Sunday that its $1.3 trillion oil fund, the world's biggest sovereign wealth fund, would freeze its investments in Russian assets and begin divesting from the country. BP, the UK energy group, also said it would divest the 20 per cent stake in Russian state-owned oil company Rosneft it had held since 2013, and other big western companies ended Russian partnerships.

The rouble had already been hit hard in the previous week, sliding to record lows following the invasion and the imposition of sanctions by the US and Europe.

On Monday, governor Elvira Nabiullina said Russia's central bank had spent $1 billion defending the rouble last Thursday, and a "small amount" on Friday.

Punitive measures

But the US and its allies ratcheted up punitive measures on Saturday, taking aim at Russia’s central bank to prevent it from using international reserves. Ms Nabiullina said on Monday that this had stopped the central bank from intervening further.

Western allies also agreed to cut some of the country’s lenders out of the Swift messaging system, a crucial piece of infrastructure for global payments.

Russians have been forming long queues to withdraw money out of cash machines, with the central bank lacking an obvious mechanism to stabilise its economy and currency.

Mr Putin introduced capital controls on Monday, banning Russians from transferring foreign currency abroad or from servicing loans in foreign currency outside the country from Tuesday. He also ordered Russian exporters to sell 80 per cent of their foreign currency revenue dating back to January 1st in an effort to help offset the rouble’s sharp decline.

But analysts agree the western sanctions can inflict long-lasting damage. "Put simply, Russia's ability to transact with any financial institution at a global level will be severely impaired, because most international banks across any jurisdiction use Swift," George Saravelos, an analyst at Deutsche Bank, wrote in a note to clients.

Junk status

“Money markets may experience some deterioration in funding conditions this week on the back of the uncertain impact of an asset freeze on global liquidity. It would be expected that the European Central Bank, Fed and other central banks step in to provide a powerful backstop if needed,” he said.

On Friday, rating agency S&P Global cut Russia's debt rating to "junk" status, underlining the risk that the military assault on Ukraine could prove even more deeply damaging to the country's financial markets.

"The Russia bond market is not functioning at all, other than EU and US banks working on unwinding any outstanding trades with Russian banks," said Kaan Nazli, a portfolio manager at Neuberger Berman. – Copyright The Financial Times Limited 2022