Interest rates

Russia doubles interest rates after sanctions drive down ruble

Russia’s central bank more than doubled interest rates on Monday in a bid to stabilize the country’s financial markets, after unprecedented Western sanctions sent the ruble down as much as 29%.

The central bank raised its main interest rate to 20% from 9.5% in an emergency decision, saying “the external conditions of the Russian economy have changed dramatically”.

The ruble fell to nearly 118 against the U.S. dollar in offshore trading on Monday, according to Bloomberg data, after Russian President Vladimir Putin put his nuclear forces on alert and the United States, the Europe and the UK have triggered sanctions aimed at cutting the country off from the global financial system.

The exchange rate then recovered to around 100 in what market participants described as deeply tense trading conditions that are making it difficult for foreigners to sell.

Russia’s largest foreign bond, $7 billion in debt maturing in 2047, has lost more than half its value to 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 difficult to trade. “If you see a quote on screen, it may or may not be live,” one said. “There is nothing certain in this environment. It’s not about fundamentals anymore, it’s about compliance issues.

Trading in stocks and derivatives on the Moscow Stock Exchange has been suspended, the Russian central bank confirmed on Monday. However, Russian-focused stocks traded in other markets around the world fell sharply.

The global certificates of deposit of Russian companies traded in London, such as Sberbank, Lukoil and VTB, remained open. Sberbank, whose European subsidiaries, warned by the European Central Bank, were “fail”, fell more than 75% and TCS Group, which owns Tinkoff, fell as much as four fifths. Gazprom halved its value. The LSE said it would suspend shares of VTB, the Russian bank, if it remained on the US list of sanctioned companies from May 25.

London’s FTSE 100 was led lower by sharp declines in shares of Russian gold producer Polymetal, down almost 50%, and steelmaker Evraz – which is controlled by Roman Abramovich and Alexander Abramov – down by 28%.

In a further sign of how Moscow is being pushed further to the fringes of global markets, Norway said on Sunday that its $1.3 billion oil fund, the world’s largest sovereign wealth fund, would freeze its investments in Russian assets and would begin to withdraw from the country. BP, the British energy group, has also said it will sell the 20% stake in Russian state oil company Rosneft it has held since 2013, and other major Western companies have ended Russian partnerships.

The ruble had already been hit hard the previous week, slipping to record highs following the invasion and imposition of sanctions by the United States and Europe. On Monday, Governor Elvira Nabiullina said Russia’s central bank had spent $1 billion defending the ruble last Thursday, and a “small amount” on Friday.

But the United States and its allies stepped up punitive measures on Saturday, targeting the Russian central bank to prevent it from using international reserves. Nabiullina said on Monday that this had prevented the central bank from intervening further. Western allies also agreed to remove some of the country’s lenders from the Swift messaging system, crucial infrastructure for global payments.

Line chart of 7-day repo minimum rate, % showing Russia's central bank raising its key rate to 20%

Russians formed long queues to withdraw cash from ATMs as the central bank lacked an obvious mechanism to stabilize its economy and currency.

“Simply put, Russia’s ability to transact with any financial institution globally will be severely compromised, as most international banks in all jurisdictions use Swift,” wrote analyst George Saravelos. Deutsche Bank, in a note to clients.

Saravelos added that he expected financial markets to reflect heightened energy supply risks, which would hamper investors’ willingness to buy risky assets and could also lower the euro.

“Money markets could see some deterioration in funding conditions this week due to the uncertain impact of an asset freeze on global liquidity. The European Central Bank, the Fed and other other central banks are stepping in to provide strong support if needed and we are not ruling out inter-meeting announcements,” he said, adding that the ruble and other emerging market European currencies were likely to come under pressure. .

On Friday, ratings agency S&P Global downgraded Russia’s debt rating to junk status, underscoring the risk that the military assault on Ukraine could prove even more damaging for global financial markets. country.

“The Russian bond market is not functioning at all, except that European and American banks are working to unwind all outstanding transactions with Russian banks,” said Kaan Nazli, portfolio manager at Neuberger Berman.

“The local bond market has had no liquidity since the start of the invasion and this is now made worse by the central bank’s decision to prevent local banks from helping foreigners reduce their bond holdings. There were some purchases of Russian Eurobonds by local banks on Friday. Now, with Swift and central bank bans, there is no activity.

Additional reporting by Philip Stafford and Harriet Clarfelt