Russia doubles interest rates as sanctions send rouble plunging

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 that “external conditions for the Russian economy have drastically changed”.

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

The exchange rate later recovered to around 102 in what market participants described as deeply strained trading conditions that make it difficult for foreigners to sell.

Russia’s biggest foreign bond, a $7bn bond maturing in 2047, halved in price to 35 cents on the dollar, according to Tradeweb data. Investors said the market was 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.”

Line chart of Exchange rate against US dollar  showing Rouble tumbles to record low

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. GDRs are a type of bank certificate that securitises the ownership of shares. Sberbank, which the European Central Bank warned was “failing”, plummeted as much as 75 per cent and TCS Group, which owns Tinkoff, dropped as much as 78 per cent. Gazprom halved in value. The LSE said it would suspend the shares of VTB, the Russian bank, if it remained on the US list of sanctioned companies from May 25.

In a further sign of how Moscow is being pushed further to the fringes of world markets, Norway said on Sunday that its $1.3tn 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.

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.

The US and its allies ratcheted up those punitive measures on Saturday, taking aim at Russia’s central bank to prevent it from using international reserves. 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.

Line chart of Minimum rate on 7 day repo, % showing Russia's central bank hikes key rate to 20%

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. The central bank said on Monday its rate increase was aimed at supporting “financial and price stability and protect the savings of citizens from depreciation”.

“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.

Saravelos added that he expected financial markets to reflect intensifying risks to energy supplies, denting investors’ willingness to buy risky assets and potentially also dragging down the euro.

“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 and we would not rule out inter-meeting announcements,” he said, adding that the rouble and other European emerging market currencies were likely to come under pressure.

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.

“The local bond market has had no liquidity since the beginning of the invasion and this is now made worse by the central bank’s decision to stop local banks from helping foreigners reduce bond holdings. There was some buying of the Russian Eurobonds by the local banks on Friday. Now with the Swift and central bank bans there isn’t activity.”

Additional reporting by Philip Stafford and Harriet Clarfelt

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