Russia raises rates and introduces capital controls as sanctions bite

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Feb 28 (Reuters) – Russia’s central bank more than doubled its key rate on Monday and introduced capital controls as the country faced growing economic isolation, but its governor said sanctions had prevented it to sell foreign currencies to support the ruble.

The admission that the restrictions had effectively tied the Bank of Russia’s hands highlights the ferocity of the backlash from Moscow’s invasion of Ukraine and the success of Western allies in restricting its ability to deploy some $640 billion in reserves exchange and gold.

“The central bank today raised its policy rate to 20% as further sanctions triggered a significant deviation in the ruble rate and limited the central bank’s options to use its gold and foreign currency reserves,” he said. said Governor Elvira Nabiullina at a press conference.

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“We had to raise rates to compensate citizens for the increased inflationary risks.”

Western sanctions had previously sent the ruble down nearly 30% to record lows. It recovered some ground after the central bank raised its main interest rate to 20%, the highest level this century, from 9.5%. Read more

The Bank of Russia sold $1 billion in foreign exchange markets on Thursday, Nabiullina said, but did not intervene on Monday.

This suggests that the ruble was supported by other anonymous market participants.

On Monday, the central bank and the Ministry of Finance ordered exporting companies, including some of the world’s largest energy producers, from Gazprom to Rosneft, to sell 80% of their foreign exchange earnings on the market, because the own The central bank’s ability to intervene in currency markets has been curbed.

Dmitry Polevoy, head of investments at Locko Invest, estimated that Russian exporters could offer $44 billion to $48 billion a month to prop up the ruble provided oil prices stay around current levels and there are no no sanctions on energy exports.

“That seems enough to stabilize the market in the next couple of weeks,” he said.

The central bank has temporarily banned Russian brokers from selling securities held by foreigners, although it did not specify which assets the ban applies to. He also said he would start buying gold on the domestic market again. Read more

Russian President Vladimir Putin has ordered a ban on foreign currency loans and bank transfers by Russian residents outside Russia from March 1, the Kremlin announced on Monday, in retaliation for economic sanctions imposed on Moscow by the ‘West.

The United States and Great Britain have prohibited their citizens or entities from carrying out transactions with the central bank, the National Wealth Fund of Russia or the Russian Ministry of Finance. Read more

Switzerland said it would adopt European Union sanctions against Russians involved in the invasion of Ukraine and freeze their assets, breaking with the traditions of the neutral country. Read more

MONEY REQUEST

Major Russian banks have also been locked out of the SWIFT messaging network that facilitates billions of dollars in financial transactions around the world, making it difficult for lenders and businesses to make and receive payments. Read more

Nabiullina said Russia has an internal replacement for SWIFT that foreign counterparties can connect to, but did not give details.

She said the banking sector faces “a structural liquidity shortfall” due to high demand for cash, and the central bank stands ready to support it.

“The central bank will be flexible to use all the necessary tools…banks have sufficient coverage to raise funds from the central bank,” Nabiullina said.

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

All banks would fulfill their obligations and the funds in their accounts would be safe, Nabiullina said, although the central bank has recommended that banks restructure some customers’ loans.

The European arm of Sberbank (SBER.MM), Russia’s biggest lender, was on the verge of bankruptcy, the European Central Bank warned on Monday, after a run on its deposits sparked by the backlash from Russia’s invasion of Ukraine. L8N2V31U9

Nabiullina said new monetary policy decisions would be driven by central banks’ assessment of external risks, adding that she would be flexible in her decisions given the “non-standard situation” facing the financial system and the economy.

She was speaking as ceasefire talks between Russian and Ukrainian officials began on the Belarusian border. Read more

The ruble ended down around 14% against the US dollar. Russian stock markets and derivatives markets were closed to hedge against further losses.

DEBT DEFAULT?

The Institute of International Finance (IIF), a trade group representing major banks, warned on Monday that Russia was extremely likely to default on its external debts and its economy would suffer a double-digit contraction this year after the new measures. retaliation from the West.

The central bank and finance ministry did not immediately respond to a Reuters request for comment on the IIF’s assessment.

Earlier, Finance Minister Anton Siluanov said the government was ready to strengthen the capital base of commercial banks if necessary.

An order that Russian brokerages reject orders to sell Russian securities from foreign clients could complicate plans by sovereign wealth funds in Norway and Australia to reduce exposure to Russian-listed companies. Read more

It was also unclear how energy giant BP, Russia’s biggest foreign investor, would follow through on a decision to shed its stake in state oil company Rosneft (ROSN.MM) at a cost that could reach $25 billion. Read more

World bank HSBC and the world’s largest aircraft leasing company AerCap are among other Western firms seeking to exit Russia over its actions in Ukraine, which Moscow calls a “special operation”. Read more

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

Our standards: The Thomson Reuters Trust Principles.

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