Russia hikes rates, introduces capital controls as sanctions bite amid Ukraine war

Russia's central bank more than doubled its key policy rate on Monday and introduced some capital controls as the country faced deepening economic isolation, but its governor said sanctions had stopped it selling foreign currency to prop up the rouble.

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

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"The central bank today increased its key rate to 20 per cent as new sanctions triggered a significant deviation of the rouble rate and limited the central bank's options to use its gold and foreign exchange reserves," Governor Elvira Nabiullina told a news conference.

"We had to increase rates (to) compensate citizens for increased inflationary risks."

Western sanctions had earlier sent the rouble tumbling nearly 30 per cent to record lows. It clawed back some ground after the central bank raised its main interest rate to 20 per cent, the highest level this century, from 9.5 per cent.

Also Read -- Rouble crashes amid Western sanctions over Ukraine assault

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

"Given restrictions on gold and forex reserves usage in dollars and euros, we did not conduct interventions today," Nabiullina said.

That suggests the rouble was supported by other unnamed market participants.

On Monday, the central bank and the finance ministry said they would order exporting companies, which include some of the world's biggest energy producers from Gazprom to Rosneft, to sell 80 per cent of their forex revenues on the market, as the central bank's own ability to intervene on currency markets was curbed.

The United States and Britain banned their citizens or entities from transacting with the central bank, Russia's National Wealth Fund or the Russian finance ministry.

Switzerland said it would adopt European Union sanctions against Russians involved in the invasion of Ukraine and freeze their assets, in a major departure from the neutral country's traditions.

Also Read -- Do sanctions ever work? Could they stop Russia’s invasion of Ukraine?

Cash shortages

Russia's major banks have also been excluded from the SWIFT messaging network that facilitates trillions of dollars' worth of financial transactions worldwide, making it hard for lenders and companies to make and receive payments.

Nabiullina said Russia had an internal replacement for SWIFT that foreign counterparties would be able to connect to, but did not give details. She said the banking sector faces "a structural deficit of liquidity" because of high demand for cash, and that the central bank was ready to support it. "The central bank will be flexible to use any tools needed ... banks have enough coverage to raise funding from the central bank," Nabiullina said.

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

All banks would fulfill their obligations and funds in their accounts are safe, Nabiullina said, although the central bank was recommending that banks restructure some clients' loans.

The European arm of Sberbank, Russia's biggest lender, was set to fail, the European Central Bank warned on Monday, after a run on its deposits sparked by the backlash from Russia's invasion of Ukraine.

Also Read — DH Deciphers | What is SWIFT? Will cutting off Russia from it really help?

Nabiullina said further monetary policy decisions would be driven by the central banks' assessment of external risks, adding that it would be flexible in its decisions given the "non-standard situation" faced by the financial system and economy.

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

The rouble was trading down around 18 per cent in late afternoon trade. Russian stock markets and derivatives markets were closed to gird against further losses.

Global implications

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 per cent 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.

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

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

Other emergency measures announced on Sunday and Monday include an assurance that the central bank would resume buying gold on the domestic market.

On Monday, it sold 3.04 trillion roubles ($28.3 billion) at a "fine-tuning" repo auction with no limit to help banks with their liquidity.

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

An order that Russan brokerages reject sell orders for Russian securities from foreign clients could complicate plans by the sovereign wealth funds of Norway and Australia to wind down exposure to Russian-listed companies. It was also unclear how energy major BP, Russia's biggest foreign investor, would follow through on a decision to abandon its stake in state oil company Rosneft at a cost of up to $25 billion.

Global bank HSBC and the world's biggest aircraft leasing firm AerCap are among other Western firms looking to exit Russia over its actions in Ukraine, which Moscow characterises as a "special operation".

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