Russia raises tariffs, introduces capital controls as sanctions bite

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© Reuters. FILE PHOTO: An exterior view shows the headquarters of the Russian Central Bank in Moscow, Russia March 29, 2021. A sign reads: “Bank of Russia”. REUTERS/Maxim Shemetov

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(Reuters) – Russia’s central bank more than doubled its key policy rate on Monday and introduced some capital controls as the country faced deeper economic isolation, but the governor said sanctions had stopped the country from selling foreign currencies to to support the ruble.

The admission that restrictions had effectively kept the Russian central bank in the hands of Russia underscores the brutality of the response to Moscow’s invasion of Moscow and the success of Western allies in limiting its ability to transfer some $640 billion in foreign exchange. – and to use gold reserves.

“The central bank raised its key rate to 20% today as new sanctions triggered a significant deviation from the ruble rate and limited the central bank’s ability to use its gold and foreign exchange reserves,” Governor Elvira Nabiullina said at a news conference.

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

Western sanctions had caused the ruble to plummet by nearly 30%. It regained some ground after the central bank raised its key interest rate from 9.5% to 20%, the highest level this century.

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

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

The Russian central bank also said trading in stocks and derivatives on the Moscow stock exchange will remain closed for a second day on Tuesday. Russian stock exchanges and derivatives markets were closed on Monday to absorb further losses.

On Monday, the central bank and the Treasury Department ordered export companies, including some of the world’s largest energy producers from Gazprom (MCX:) to Rosneft, to sell 80% of their forex earnings on the market, according to the equity capital of the United States. central bank. to intervene in the foreign exchange markets was restricted.

Dmitry Polevoy, head of investment at Locko Invest, estimated that Russian exporters could offer $44 billion-$48 billion a month to support the ruble, provided oil prices stayed around current levels and there were no sanctions on exports of oil. energy.

“This seems to be enough to stabilize the market in the coming weeks,” he said.

The central bank temporarily banned Russian brokers from selling securities owned by foreigners, though it did not specify assets covered by the ban. It also said it would resume buying gold in the domestic market.

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

The United States and Great Britain banned their citizens or entities from transacting with the central bank, the Russian National Wealth Fund or the Russian Ministry of Finance.

Switzerland said it would approve European Union sanctions against Russians involved in the invasion of Ukraine and freeze their assets, in wide departure from the neutral country’s traditions.

“If Russia continues on its current path, it is quite easy to see how the most recent sanctions could only be the first steps in a serious and lasting severance of Russia’s financial and economic ties with the rest of the world.” wrote Oliver Allen of Capital. Economy in a report.

ASK FOR CASH

Russia’s major banks are also banned from the SWIFT messaging network that facilitates billions of dollars in financial transactions worldwide, making it difficult for lenders and businesses to make and receive payments.

Nabiullina said Russia had an internal replacement for SWIFT that foreign counterparts could connect to, but did not provide details.

She said the banking sector is facing “a structural liquidity shortage” due to high demand for cash, and that the central bank was willing to support it.

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

Russians lined up at ATMs on Sunday, fearing the sanctions would lead to cash shortages and disrupt payments.

All banks would meet their obligations and the money in their accounts is safe, Nabiullina said, although the central bank recommended banks restructure some customers’ loans.

The European branch of Sberbank, Russia’s largest lender, would go bankrupt, the European Central Bank warned Monday after a run on its deposits following the backlash from Russia’s invasion of Ukraine.

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

She spoke as ceasefire negotiations between Russian and Ukrainian officials began on the Belarusian border.

The ruble ended about 14% lower against the US dollar.

DEBT STANDARD?

The Institute of International Finance (IIF), a trade group that represents major banks, warned on Monday that Russia was very likely to default on its foreign debts and that its economy will shrink by double digits this year following new retaliatory measures by the government. West.

The central bank and the Treasury Department did not immediately respond to a request from Reuters for comment on the IIF assessment.

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

An order that Russian brokers reject sales orders for Russian securities from foreign clients would complicate plans by Norway’s and Australia’s sovereign wealth funds to reduce exposure to Russian-listed companies.

It was also unclear how energy wholesaler BP (NYSE:) Plc, Russia’s largest foreign investor, would act on a decision to give up its stake in state oil company Rosneft for up to $25 billion.

JPMorgan (NYSE:) Asset Management on Monday suspended its JPM Emerging Europe Equity fund, a source familiar with the matter said, and Danske Invest of Denmark said it had suspended trading equity funds with significant exposure to Russian stocks.

World Bank HSBC and the world’s largest aircraft leasing company, AerCap, are among other Western companies looking to exit Russia over its actions in Ukraine, which Moscow has characterized as a “special operation.”