Russia's central bank on Monday raised its benchmark interest rate to the highest level in this century and introduced capital controls to stabilize the currency and financial markets in the face of a new round of sanctions from Western countries.

  According to data from FactSet, the ruble against the dollar hit a record low of 119.25 at the beginning of the day and then stabilized and rebounded. It is currently trading around 101, and the intraday decline has narrowed to 20%.

The Russian central bank said the ruble exchange rate was supported with the help of policy.

Russia's central bank governor clears doubts about rate hike decision

  The ruble tumbled nearly 40 percent in Asian trading hours on Monday after the U.S. and Europe announced sanctions targeting the Russian financial system over the weekend.

The Central Bank of Russia then unexpectedly announced that it would raise its benchmark interest rate by 1,050 basis points to 20%.

"The external conditions of the Russian economy have changed dramatically," the statement said. "The increase in key interest rates will ensure that the deposit rate rises to the required level to compensate for the increasing risks of devaluation and inflation. This is to support financial and price stability, Necessary to protect citizens' savings from devaluation."

  The statement mentioned that the central bank will make further decisions on key interest rates based on a risk assessment of internal and external conditions and the response of financial markets, taking into account actual and expected inflation dynamics related to economic development.

  Since 2021, Russia has raised its benchmark interest rate 8 times in total as the economic recovery has exacerbated inflationary pressures.

JPMorgan Chase predicts that the central bank is widely expected to continue raising interest rates by 100 basis points at the rate meeting scheduled for March 18, but the escalating situation in Ukraine has brought a new round of challenges to the Russian economy.

JPMorgan Chase pointed out in a research report that Russia's inflation rate will reach 10% by the end of this year, and there are great upside risks.

  Elvira Nabiullina, Governor of the Russian Central Bank, held an interim press conference on the same day.

"As the ruble fluctuates significantly due to the new sanctions, we must raise interest rates to compensate citizens for the increased risk of inflation," she said. "The Central Bank of Russia is taking steps to stop capital flight by limiting the sell-off of the ruble and government bonds. ."

  Russians began queuing at cash machines across the country after the new round of sanctions was announced, while financial institutions faced a rush to buy foreign currency amid fears that sanctions could lead to cash shortages and disruption to payment instruments, the ruble exchange rate Pressure down.

In response, Nabiullina said the banking sector faced a "structural liquidity deficit" due to high demand for cash, but all banks would meet their obligations and the funds in the accounts were safe.

Russian stocks and derivatives markets were closed on Monday to avoid volatility risks.

An internal document released by the Russian financial market organization ACI Russia on the same day showed that the Russian central bank launched capital control measures, requiring brokers to suspend the sale of Russian securities by foreign legal entities and individuals from the morning, which may reduce the Norwegian and Australian sovereign wealth funds. Plans for exposure to Russian-listed companies have been delayed.

  Meanwhile, Russia’s central bank decided to significantly increase the range of securities that can be used as collateral for central bank loans and temporarily ease restrictions on banks’ open foreign currency positions.

Banks suffering from "external circumstances" are allowed to keep their positions above official limits.

The central bank will continue to monitor changes in currency positions to ensure the normal functioning of money markets and the financial stability of lenders.

Nabiulina revealed that further monetary policy decisions will be driven by the central bank's assessment of external risks, adding that the central bank's decision-making will be flexible given the "non-standard conditions" facing the financial system and economy.

  New Western sanctions against Russia could have a wider global impact, Nomura Securities said in a report.

"Sanctions could end up hurting Russia's trade cash flow (about 80% of foreign exchange transactions processed by Russian financial institutions are denominated in dollars), hurting the growth prospects of Russia's key trading partners, including Europe, and leading to greater inflation stress and stagflation risk," the report said.

Europe and the United States "kill" Russia's foreign exchange reserves

  On the 27th of last month, the United States and the European Union jointly announced the implementation of restrictions on the Russian central bank to prevent its allocation of foreign exchange reserves to weaken the impact of the sanctions.

Nabiulina admitted at the press conference that the sanctions had affected the foreign exchange and gold reserves available to the Russian central bank.

  The first financial reporter noticed that

due to the multiple rounds of sanctions adopted by the United States in the past few years, Russia has continued to advance in the wave of de-dollarization. The country has adopted measures to reduce the direct use of the U.S. dollar, reduce the proportion of foreign exchange reserves, and significantly sell U.S. Treasury bonds. , expand non-dollar financing, increase gold holdings, establish a domestic payment system and financial information exchange system (SPFS) and other measures to gradually reduce risks.

The U.S. dollar has lost its dominance in Russia's exports with major trading partners, central bank data show.

  According to the official website of the Central Bank of Russia, as of January 31 this year, the country's foreign exchange reserves exceeded 630 billion US dollars, which is at an all-time high.

Analysts pointed out that this would have helped to defend against sanctions and loss of export revenue, but the scope of the freezing of foreign exchange reserve assets involved in the new round of sanctions is significantly expanded, and the situation is becoming more severe.

Josh Lipsky, director of the Atlantic Council's Center for Geoeconomics, formerly of the International Monetary Fund (IMF), pointed out that

sanctions on Russia's central bank could deal a major blow to the country's economy.

At present, of the more than $600 billion in international reserves of the Russian central bank, more than $400 billion in foreign exchange reserves are deposited in foreign-issued securities or in cash and deposits of foreign banks.

The move announced on Saturday will affect nearly 40% of Russia’s foreign exchange reserves, according to the latest report from the Bank of Russia, significantly weakening its ability to withstand sanctions.

  Faced with the predicament, Russia's central bank and finance ministry announced on Monday that they had ordered export companies including Gazprom and Rosneft to sell 80 percent on the open market due to their limited ability to intervene in currency markets. % of foreign exchange earnings.

  Sony Kapoor, chief executive of the Nordic Institute for finance, Technology and Sustainability, pointed out that

the decision to crack down on central banks has only had a few precedents in the past, including in Iran and Venezuela, and for Russia's scale economy for the first time.

"For any type of financial transaction involving Russia, there would be a huge risk premium, which would have a significant negative macroeconomic impact."

  The former deputy governor of the Irish Central Bank Gerlach (Stefan Gerlach) believes that Russia's economic management is facing an extremely complicated situation at this stage.

"The financial system needs one thing to function - trust," he said. "If you do business, you need to trust your counterparties. If you suddenly realize that they can't get help from the government, the risk of dealing with them will be Get unbelievable, and it's going to be bad."