Moscow (Reuters) – Under the impression of Western sanctions, Russia is braving itself against the currency crisis with a massive interest rate hike and its own payment system.
The central bank, which was also subject to punitive measures, raised the key interest rate on Monday to 20 from the previous 9.5 percent. This is necessary to support financial and price stability and to protect citizens’ savings from falling in value. After decoupling Russian banks from the Swift international payment system, Russia is now offering an internal alternative. According to central bank head Elvira Nabiullina, foreign counterparties can also connect to this system.
In response to Russia’s invasion of Ukraine, the West had disconnected a number of Russian banks from Swift. These financial institutions can no longer use this system to settle their liabilities to many foreign creditors. According to Nabiullina, all banks will meet their obligations. All funds in the accounts are safe.
At the same time, she emphasized that the central bank did not intervene on the foreign exchange market on Monday. Those who threw dollars and euros on the market to support the tumbling ruble left them open. The EU had put into effect the announced severe sanctions against Moscow’s central bank during the night. They include a ban on transactions by the bank in relation to Russia’s large currency reserves in euros. In addition, the assets of the bank in the EU are confiscated.
The Moscow stock market has been closed for the time being because of the Ukraine war. According to its own information, the central bank will inform you before the start of the stock market on Tuesday whether and when shares and derivatives can be traded again.
Russia’s escalating conflict with the West following its invasion of Ukraine caused the country’s currency to plummet. The dollar, on the other hand, temporarily rose to a record high of 120 rubles. The Russian currency later recovered and settled at 98 rubles, down 18 percent from Friday’s close.
“The external conditions for the Russian economy have changed drastically,” emphasized the central bank. Local companies should also sell 80 percent of their foreign exchange earnings, announced the central bank and the Ministry of Finance.
Economists doubt whether the actions will be enough to stabilize the currency. “The interest rate hike by the Russian central bank is intended to make deposits in rubles more attractive and curb the capital flight that is now beginning,” said economist Friedrich Heinemann from Mannheim’s ZEW. This will hardly succeed: “Russian assets and the ruble have suddenly become junk on the financial markets with the Russian attack on Ukraine.”
According to economists, the economy between Kaliningrad and Vladivostok is about to collapse due to western sanctions. The gross domestic product is likely to fall by 20 percent in the second quarter, as the major US bank JPMorgan estimates. A drop of 3.5 percent is expected for 2022 as a whole. The inflation rate should be at least ten percent at the end of the year.