Following a 30% drop in the value of the rouble versus the US dollar, Russia has more than quadrupled its main interest rate. The Bank of Russia announced a rate increase to 20% from 9.5 per cent to assist offset the impact of the rouble’s decline on pricing.
It came as the UK, together with the US and the EU, shut Russia’s banks off from Western financial markets.
Any UK entity is barred from transacting with Russia’s central bank, finance ministry, or wealth fund. “The Russian debris fell to a new low after it was exposed over the weekend that some of the country’s banks will be barred from utilising the Swift international payment system. On Sunday, Russia’s central bank issued a plea for calm amid worries of a bank run in the nation.
According to Will Walker-Arnott, senior investment manager at Charles Stanley, “it appears that Russia is progressively becoming an economic pariah, increasingly isolated from the global financial system.”
Rising tensions have pushed the price of Brent crude oil beyond $100 (£75) per barrel. The European Union, the United States, and its allies’ decision to shut off several Russian banks from Swift is the strongest punishment taken on Moscow over the Ukraine war too far. Russia’s central bank’s assets will also be blocked, restricting the country’s ability to access its foreign reserves. Russia relies heavily on the Swift system for vital oil and gas exports.
Investors were especially concerned on Monday after Russian President Vladimir Putin ordered the military to place its deterrent forces, including nuclear weapons, on “special alert.” Moody’s announced last week that it was analysing Russian bonds to possibly downgrade them to “junk,” putting Russia in a league with riskier countries that often have to pay more to borrow. S&P, a competitor credit rating firm, has already downgraded the country to junk status.
Russia’s central bank issued a calm plea over the weekend, fearing that the new financial restrictions will precipitate a run on the country’s banks. It stated that it “has the required resources and instruments to preserve financial stability and ensure the financial sector’s operational continuity.”
The Russian rouble fell to a fresh record low versus the US dollar on the first day of trade since tough new sanctions were implemented. The euro fell more than 1%, as the price of oil rose. The actions implemented over the weekend raise the financial and social consequences of Russia’s invasion of Ukraine. Russians are already waiting in huge queues, fearful that their bank cards may stop working or that cash withdrawal limitations would be imposed.
According to authorities, parts of Sberbank, the Russian state-owned bank European’s businesses are failing. The new limit on the Central Bank of Russia’s ability to deploy its roughly $630 billion in foreign reserves weakens the rouble’s defence. Because of the currency’s weakening, inflation is anticipated to rise. This leaves the central bank with a few alternatives, such as hiking interest rates or restricting the amount of money that may be taken into or out of the nation.
