Russian central bank raises interest rates to 20% to prop up ruble

Central Bank of Russia in Moscow.

Gavriil Grigorov | CASS | Getty Images

Russia’s central bank on Monday more than doubled the country’s key interest rate from 9.5% to 20% as its currency, the ruble, hit a record high against the dollar following a series new sanctions and penalties imposed on Russia by Europe and the United States for their invasion of Ukraine.

The rate hike, the central bank said, “is designed to offset the increased risk of ruble depreciation and inflation.”

This follows the central bank’s order to halt foreign offers to sell Russian securities in a bid to contain market fallout. The ruble fell as low as 119.50 per dollar, down 30% from Friday’s close.

The bank also said it would release 733 billion rubles ($8.78 billion) from local bank reserves to boost liquidity. Russian Central Bank Governor Elvira Nabiullina will hold a briefing Monday at 1:00 p.m. London time.

The dramatic developments underscore fears of a run on Russian banks. Already, long queues to withdraw cash have been seen at ATMs in Russian cities. Sberbank Europe, which is owned by Russian state bank Sberbank, says it has experienced “significant outflows of deposits in a very short period of time”.

In a statement on Monday, the Russian Finance Ministry and the central bank announced their intention to order domestic exporters to sell their foreign currency earnings from February 28. This decision will oblige exporters to sell 80% of all their foreign exchange earnings received under export contracts.

Over the weekend, the United States, European allies and Canada agreed to cut major Russian banks from the SWIFT interbank messaging system, which connects more than 11,000 banks and financial institutions in more than 200 countries and territories. . The EU also announced on Sunday that it was closing its airspace to Russian planes.

The volatility of the Russian markets “shows that the freezing of the assets of the Russian central banks, which was decided this weekend by the EU as well as by the other Western countries led by the United States, shows how an important step,” David Marsh, chairman of economic policy think tank OMFIF, told CNBC’s “Squawk Box Europe” on Monday.

“It’s actually much bigger than the SWIFT action, which was breaking a taboo from Germany when it joined this over the weekend,” he said, referring to the sanctions that cut off several Russian banks from the SWIFT global payment system.

“That means there’s going to be this massive dollar rush in Russia – we’ve seen the queues outside the banks and so on.”

Over the past few years, Russia has amassed a war chest of some $630 billion in foreign exchange reserves, its highest level on record, which analysts say will help it weather sanctions and losses. export earnings. But if some of those assets are frozen, that changes the math for Russia.

“We will cripple the assets of the Russian central bank,” European Commission President Ursula von der Leyen said in a statement on Sunday. “It will freeze its transactions. And it will prevent the Central Bank from liquidating its assets.”

“The fact that the Russians can’t deploy a good chunk of that $600 billion in foreign currency reserves that the Russian central bank has carefully built up means we’re in an emergency war economy,” Marsh said. “And the idea of ​​isolating Russia, which a few days ago would have been considered unthinkable, is now a reality.”

The ramping up of punitive measures against Russia – the strongest the EU has ever deployed against it – comes as Russian forces deployed by President Vladimir Putin carry out offensives across Ukraine. This follows several days of heavy shelling and missile strikes in major urban centers, including Ukraine’s two largest cities, its capital Kiev and Kharkiv, which together have a population of nearly 5 million.

Ukrainian forces have so far managed to halt Russian advances and maintain control of the two cities, Ukraine’s Defense Ministry said on Sunday.

Correction: This story has been updated to show that Russia’s rate hike has more than doubled from its original rate.

Leslie M. Gill