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Russia sharply increases 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 to offset the risks of the rouble’s rapid depreciation to financial stability and protect Russians’ savings from being wiped out, according to RIA Novosti, the state-owned news agency.

The rouble dropped to almost 118 against the US dollar in offshore trading on Monday, according to Bloomberg data, following a weekend when Russian President Vladimir Putin put his nuclear forces on high alert and the US and Europe unleashed their toughest sanctions in a bid to cut the country off from the global financial system.

The central bank also said it would announce later on Monday whether equity trading would resume after the morning session was cancelled. The country’s benchmark Moex index has dropped around 30 per cent so far in February in local currency terms.

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

Ukraine’s military also said that enemy troops continued to attack airports, air defence systems, critical infrastructure and residential areas around the country. Russian and Ukrainian military claims cannot be independently verified.

In an early 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 its 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.

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 Russian central bank stepped in to shore up the rouble last week by selling foreign currency reserves. But the weekend’s sanctions against the central bank compromise its scope to keep up this support.

“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.

Russia’s central bank sought to calm market nerves on Sunday, saying it would offer unlimited liquidity to banks. “The Russian banking system is stable, and has sufficient capacity of capital and liquidity to function in any situation,” it said.

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