Ukraine conflict: Russia doubles interest rate after rouble slumps

Ukraine conflict: Russia doubles interest rate after rouble slumps

Published9 minutes ago

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People stand in line to use an ATM money machine in St Petersburg, Russia February 27, 2022

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People stand in line to use an ATM money machine in St Petersburg on Sunday

Russia has more than doubled its interest rate to 20% in a bid to halt a slump in the value of its currency.

 

The Bank of Russia raised the rate from 9.5% after the rouble sank 30% after new Western sanctions. The currency then eased back to stand 20% down.

 

The collapse in value erodes the currency's buying power and could wipe out the savings of ordinary Russians.

 

Amid pictures at the weekend of queues at cash machines, Russia said it had the resources to ride out sanctions.

 

Ahead of an emergency meeting between President Vladimir Putin and his economic advisers on Monday, Kremlin spokesman Dmitry Peskov said: "These are heavy sanctions, they're problematic, but Russia has the necessary potential to compensate the damage from these sanctions." He said Russia would respond with its own sanctions.

 

At the weekend, Russia's central bank issued an appeal for calm amid fears that new financial sanctions could spark a run on its banks. It said it had the "the necessary resources and tools to maintain financial stability."

 

What is Swift and why is banning Russia so significant?

What sanctions are being imposed on Russia?

Videos on social media on Sunday appeared to show long queues forming at cash machines and money exchanges in Moscow, with people worried that their bank cards may stop working or that limits will be placed on the amount of cash they can withdraw.

 

Chris Weafer, chief executive at consultancy firm Micro-Advisory and based in Moscow, said on Monday he was also seeing some queues in food stores.

 

"You are beginning to see a little bit of queuing in some grocery stores, particularly people buying some goods that they think might come into short supply due to trade restrictions or maybe will be subject to big price increases because of the rouble devaluation, but the bottom line is, this set of sanctions are hitting ordinary Russians to an extent that previous sanctions have not and people are now becoming aware of that.

 

"People are a lot more fearful. They're worried about what might come next. There is already talk about some companies having to either go on reduced working hours, or even suspend production because they're not able to access maybe key parts from the West due to sanctions or due to trade limitations, so there's a great deal of concern on the street."

 

Moscow resident Anastasia told Reuters that she expected her economic situation to get worse. "It's inevitable in these circumstances," she added. Whilst another Moscow resident Sergey said he was already seeing an impact. "Prices are rising, of course, savings are shrinking and stocks are falling."

 

Rouble v dollar

The UK, along with the US and EU, have already cut off Russia's banks from financial markets in the West, prohibiting dealings with the central bank, state-owned investment funds and the finance ministry.

 

Chancellor Rishi Sunak said the measures demonstrated the UK's "determination to apply severe economic sanctions in response to Russia's invasion of Ukraine".

 

Russia has about $630bn (£470bn) in reserves - a stockpile of savings - built up from soaring oil and gas prices.

 

But because a lot of this money is stored in foreign currencies like the dollar, the euro and sterling as well as gold, a Western ban on dealing with Russia's central bank restricts Moscow from access to the cash.

 

Last week, Russia's central bank was forced to increase the amount of money it supplies to ATMs after demand for cash reached the highest level since March 2020.

 

On Monday, the central bank said it had ordered brokers to suspend the execution of all orders by foreign legal entities and individuals to sell Russian investments.

 

It also said it had yet to decide whether to open markets other than foreign exchange and money markets on Monday.

 

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Analysis box by Theo Leggett, business correspondent

The sanctions that have been imposed by the EU, the US, the UK and others are unprecedented. It's one thing to block the foreign reserves of a country like Iran or Venezuela, quite another to act against Russia - a country with a major role in global trade and a very significant supplier of oil and gas.

 

The reaction on the currency markets has been dramatic - with the rouble plummeting, despite the central bank's efforts to prop it up using interest rates. There may already have been a rush to the foreign currency ATMs in Russian cities, but citizens there have yet to feel the full impact.

 

At the very least prices will rise dramatically; banking collapses, hyperinflation and a deep recession are all potential consequences.

 

But sanctions are a two-way street. Cutting the central bank off from its reserves and limiting Russian institutions' access to the Swift network will not only hurt Russia - western institutions also face losses from debts that cannot or will not be repaid, for example. And then there is the risk of countermeasures from Russia - potentially hitting energy exports.

 

Such sweeping sanctions being imposed in such a unified way is remarkable. It's also a very big gamble.

 

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'Economic pariah'

Attempts to put a stranglehold around Russia's finances is sending shockwaves across the financial and corporate world, including:

 

The price of gas for delivery over the next couple of months soared by 24%

European markets fell amid fears over financial stability, with London's FTSE 100 down more than 1% and Paris and Frankfurt about 2% lower

The price of crude oil jumped 5.4% to $103 per barrel, and the dollar and gold rose as investors sought safer places to put their money

BP's share price slumped by 7% after it decided to exit Russian oil and gas operations at a cost of up to $25bn

Equinor, the energy firm majority owned by the Norway government, starts to divesting its joint ventures in Russia

Wheat prices see their biggest one-day gain in a decade on supply worries from Russia and Ukraine

Russia's stock market remains closed amid fears of a massive share sell-off

Will Walker-Arnott, senior investment manager at Charles Stanley, told the BBC's Today programme that "it looks like Russia is increasingly becoming an economic pariah, increasingly isolated from the global financial system".

 

Cutting some Russian banks from international payments system Swift is the harshest measure so far imposed to date on Moscow over the Ukraine conflict.

 

The assets of Russia's central bank will also be frozen, limiting the country's ability to access its overseas reserves.

 

Russia is heavily reliant on the Swift system for its key oil and gas exports.

 

The intention is to "further isolate Russia from the international financial system", a joint statement said.

 

On Monday, the European Central Bank (ECB) said several European subsidiaries of Sberbank Russia, which is Russia's largest bank and majority owned by the Russian government, were failing or likely to fail due to reputational cost of the war in Ukraine.

 

Sberbank Europe AG, which had total assets of €13.64bn (£11.4bn) at the end of last year, along with its Croatian and Slovenian units, suffered a rapid deposit outflow in recent days and is likely to fail to pay its debts or other liabilities, said the ECB, which is the lenders' supervisor.

 

 

Ukraine conflict: What is Swift and why is banning Russia so significant?

By Russell Hotten

BBC News

 

Published1 day ago

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Protestors against Russia's invasion of Ukraine

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The European Union, US, UK and allies have agreed to exclude a number of Russian banks from Swift, an international payment system used by thousands of financial institutions.

 

The move aims to hit the country's banking network and its access to funds via Swift, which is pivotal for the smooth transaction of money worldwide.

 

What is Swift?

Swift is the global financial artery that allows the smooth and rapid transfer of money across borders. It stands for Society for Worldwide Interbank Financial Telecommunication.

 

Created in 1973 and based in Belgium, Swift links 11,000 banks and institutions in more than 200 countries.

 

But Swift is not your traditional High Street bank. It is a sort of instant messaging system that informs users when payments have been sent and arrived.

 

What sanctions are being imposed on Russia?

It sends more than 40 million messages a day, as trillions of dollars change hands between companies and governments.

 

More than 1% of those messages are thought to involve Russian payments.

 

Who owns and controls Swift?

Swift was created by American and European banks, which did not want a single institution developing their own system and having a monopoly.

 

The network is now jointly-owned by more than 2,000 banks and financial institutions.

 

It is overseen by the National Bank of Belgium, in partnership with major central banks around the world - including the US Federal Reserve and the Bank of England.

 

Person counting roubles

IMAGE SOURCE,REUTERS

Swift helps make secure international trade possible for its members, and is not supposed to take sides in disputes.

 

However, Iran was banned from Swift in 2012, as part of sanctions over its nuclear programme. It lost almost half of its oil export revenues and 30% of foreign trade.

 

Swift says it has no influence over sanctions and any decision to impose them rests with governments.

 

How will banning Russia from Swift affect it?

At this stage, it is not known which Russian banks will be removed from Swift. This is expected to become clear in the coming days.

 

The statement from EU, the US, the UK and others said the move would "ensure that these banks are disconnected from the international financial system and harm their ability to operate globally".

 

The aim is for Russian companies to lose access to the normal smooth and instant transactions provided by Swift. Payments for its valuable energy and agricultural products will be severely disrupted.

 

Banks would be likely to have to deal directly with one another, adding delays and extra costs, and ultimately cutting off revenues for the Russian government.

 

Russia was threatened with a Swift expulsion before - in 2014 when it annexed Crimea. Russia said the move would be tantamount to a declaration of war.

 

Western allies did not go ahead, but the threat did prompt Russia to develop its own, very fledgling, cross-border transfer system.

 

To prepare for such a sanction, the Russian government created a National Payment Card System, known as Mir, to process card payments. However, few foreign countries currently use it.

 

Why has the West been divided over Swift?

Some nations - such as Germany, France and Italy - had been reluctant to take action against Russia's use of Swift.

 

Russia is the European Union's main provider of oil and natural gas, and finding alternative supplies will not be easy. With energy prices already soaring, further disruption is something many governments want to avoid.

 

Companies owed money by Russia would have to find alternative ways to get paid. The risk of international banking chaos is too large, say some people.

 

Alexei Kudrin, Russia's former finance minister, suggested being cut off from Swift could shrink Russia's economy by 5%.

 

But there are doubts about the lasting impact on Russia's economy. Russian banks might route payments via countries that have not imposed sanctions, such as China, which has its own payments system.

 

 

Ukraine: What sanctions are being imposed on Russia?

Published19 minutes ago

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Putin

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Western nations are imposing increasingly severe sanctions on Russia following its invasion of Ukraine.

 

The measures are designed to cripple Russia's economy and punish its government for taking military action.

 

What is a sanction?

A sanction is a penalty imposed by one country on another, often in order to stop it acting aggressively or breaking international law.

 

Sanctions are often designed to hurt a country's economy or the finances of individual citizens such as leading politicians. They can include travel bans and arms embargoes.

 

They are among the toughest measures nations can use, short of going to war.

 

What sanctions are Western nations imposing?

Swift

 

Swift logo

IMAGE SOURCE,REUTERS

The European Union, US, UK and allies have agreed to remove selected Russian banks from the Swift messaging system, which enables the smooth transfer of money across borders.

 

The action is aimed at cutting Russia off from the international financial system and to "harm their ability to operate globally".

 

What is Swift and why is banning Russia so significant?

A ban from Swift will delay the payments Russia gets for exports of oil and gas.

 

However, Russia could get paid through other systems - for example, China's Cross-Border Interbank Payment System.

 

The ban will also affect companies owed money by Russia - and cause disruption to some countries' energy supplies.

 

Russia's central bank

 

Russian central bank

IMAGE SOURCE,EPA

Image caption,

The Bank of Russia headquarters in Moscow

Western leaders have agreed to freeze the assets of Russia's central bank, to limit its ability to access its $630bn international dollar reserves.

 

In co-ordination with the US and the EU, the UK government has also banned British people and businesses from making transactions with the Russian central bank, its finance ministry and its wealth fund.

 

Russia central bank urges calm amid cash run fears

Targeting a central bank of a G20 nation is unprecedented and designed to "push the whole of Russia in to as deep a recession as possible, with the added chaos of bank runs", says BBC economics editor Faisal Islam.

 

After its currency, the rouble, slumped by 30% against the US dollar, Russia has more than doubled its key interest rate in an attempt to stem the decline.

 

Other financial measures

 

Logo of Russian bank SBER

IMAGE SOURCE,GETTY IMAGES

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State-owned Sberbank is one of the biggest Russian banks

On top of action on the Swift system and Russia's central bank, all major Russian banks are having their assets frozen and being excluded from the UK financial system. This stops them from accessing sterling and clearing payments through the UK.

 

The UK has also announced laws to stop major Russian companies and the state raising finance or borrowing money on UK markets, and placed a limit on deposits Russians can make to UK bank accounts.

 

EU measures have been announced targeting 70% of the Russian banking market and key state-owned firms, including defence firms.

 

Exports to Russia

 

The UK, EU, US and other countries have announced curbs on products that can be sent to Russia. These include dual-use goods, which are items that could have both a civilian and military use, like high-tech items, chemicals or lasers.

 

The EU is aiming to make it impossible for Russia to upgrade its oil refineries with an export ban on certain materials. It is also banning the sale of aircraft and equipment to Russian airlines in an attempt to damage its economy and connectivity.

 

Targeting individuals

 

Western government have also imposed sanctions on some individuals.

 

These include Russian President Vladimir Putin and his Foreign Minister Sergei Lavrov, whose assets in the US, EU, UK and Canada will be frozen and, in the case of the US, a travel ban imposed.

 

The EU, UK, US and Canada have launched a transatlantic task force to identify and freeze the assets of sanctioned individuals and companies, targeting more "officials and elites close to the Russian government, as well as their families".

 

The UK is limiting the sale of citizenship via "golden passports", which allow wealthy Russians to become citizens.

 

Who is not on the UK sanctions list?

West orders sanctions on Russia's Putin and Lavrov

Other measures

 

A worker walking pass by an output filtration facility of a gas treatment unit at the starting point of the Nord Stream 2 offshore natural gas pipeline

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Image caption,

Germany has blocked the Nord Stream 2 pipeline from Russia from coming into operation

The EU has announced a blanket ban on Russian flights. Russian aircraft are unable to land in, take off from or fly over any EU nation, meaning longer journey times, and have also been barred from UK airspace

The EU is also going to ban Russia's state-owned news outlets Sputnik and Russia Today

Germany has put on hold permission for the Nord Stream 2 gas pipeline from Russia to Germany to open

The UK, US and Australia are also imposing financial sanctions on Belarus for its role in the assault on Ukraine

What other sanctions could Russia face?

Western nations could also look at the option of blocking Russian oil and gas exports - which make up a fifth of Russia's economy and half of its earnings from exports.

 

Refusing to buy its oil and gas would be a very tough sanction, but it would also be damaging to Western nations that rely on it.

 

Russia supplies 26% of the EU's crude oil and 38% of its gas. Even a brief cut in gas supply would raise energy prices.

 

A sign for Bank Rossiya

IMAGE SOURCE,TASS VIA GETTY IMAGES

Image caption,

Rossiya Bank is one of five banks sanctioned by Britain

How has Russia reacted to the sanctions?

Russia's foreign ministry has threatened sanctions of its own against the West. This may include reducing or shutting off gas supplies to Europe.

 

British airlines have now been banned from Russian airspace or landing at Russian airports, and in a retaliatory move, Russia's biggest airline, Aeroflot, said on Sunday it would cancel all flights to European destinations until further notice.

 

Hitting the Russian banking sector is likely to damage firms which do business in Russia, or have assets in its banks, and the export ban on high-tech goods will hit many Western manufacturers.