March 27, 2023

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Russia raises interest rates sharply as sanctions plunge the ruble

Russia raises interest rates sharply as sanctions plunge the ruble

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

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

The ruble fell to nearly 118 against the US dollar in offshore trade on Monday, according to Bloomberg data, after a weekend when Russian President Vladimir Putin was He put his nuclear forces on high alert The United States and Europe unleashed it The most severe punishments Yet in an attempt to isolate the country from the global financial system. The exchange rate later recovered to around 102 in what market participants described as highly tense trading conditions making it difficult for foreigners to sell.

Russia’s largest foreign bond, a $7 billion bond maturing in 2047, has halved to 35 cents on the dollar, according to Tradeweb data. Investors said that trading in the market is very difficult. Someone said, “If you see a quote on the screen, it may or may not be live.” “There is nothing certain in this environment. It is no longer about the basics, it is about compliance issues.”

The market moves came as Ukraine’s military said on Monday it had repelled another night of attacks on Kyiv, as a column of Russian troops repeatedly tried to storm the capital.

The Ukrainian military also said enemy forces continued to attack airports, air defense systems, critical infrastructure and residential areas across the country. The Russian and Ukrainian military claims cannot be independently verified.

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In an early indication of how to push Moscow to the fringes of global markets, Norway said on Sunday That its $1.3 trillion oil fund, the world’s largest sovereign wealth fund, would freeze its investments in Russian assets and start divesting from the country. BP, also British energy group He said It will give up its 20 percent stake in Russia’s state-owned oil company Rosneft, which it has held since 2013.

The ruble had already been hit hard last week, dropping to record lows in the wake of the invasion and imposition of sanctions by the United States and Europe.

The United States and its allies tightened those punitive measures on Saturday, targeting the Russian Central Bank to prevent it from using international reserves. The Western allies also agreed to exclude some of the country’s lenders from the Swift messaging system, an important part of the global payments infrastructure.

Line chart of the 7-day low repo rate, % shows that the Russian Central Bank raises the key rate to 20%

The Russians were forming long queues to withdraw money from the cash machines, as the central bank lacked a clear mechanism to stabilize its economy and currency. On Monday, the central bank said the interest rate hike aims to support “financial and price stability and protect citizens’ savings from consumption.”

“Simply put, Russia’s ability to transact with any financial institution globally would be severely impaired, as 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 expects financial markets to reflect the increased risks to energy supplies, which will reduce investors’ appetite for risky assets and may also lead to a lower euro.

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Financial markets may see some deterioration in funding conditions this week on the back of the uncertain impact of the asset freeze on global liquidity. The European Central Bank, the Fed and other central banks are expected to step in to provide strong support if needed and we will not rule out announcements between meetings,” he said, adding that the ruble and other European emerging market currencies were likely to come under pressure.

On Friday, rating agency S&P Global Downgraded Russia’s debt rating to “junk” The situation, underscoring the danger that a military attack on Ukraine could prove even more harmful to the country’s financial markets.

“The Russian bond market is not working at all, with the exception of European and American banks unwinding any outstanding deals with Russian banks,” said Kan Nazli, a portfolio manager at Neuberger Berman.

The domestic bond market has been illiquid since the start of the invasion, and it has now been exacerbated by the central bank’s decision to ban local banks from helping foreigners reduce bond holdings. There were some Russian Eurobond purchases by local banks on Friday. Now with Swift and the central bank banned, there is no activity.”

Shares of Russian companies listed on a foreign exchange also fell on Monday as investors sold GDRs – a type of bank certificate that secures ownership of shares. The MSCI index, which tracks Russian stocks trading in London and New York, lost as much as 55 per cent. The metric, priced in US dollars, is down 70 percent over the year so far.

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Shares of Sberbank in London plunged more than 60 per cent. Shares of Gazprom and Lukoil Energy fell by about 50 percent.

Additional reporting by Philip Stafford and Harriet Clarevelt