Russia’s central bank more than doubled interest rates to 20 per cent to try to protect the collapsing ruble and steady the shaky financial markets as the West’s increasingly tough sanctions began to draw economic blood.
The central bank swung into action before ruble trading was due to start at 10 a.m. Monday Moscow time. In offshore trading, the ruble’s value was indicated as much as 30 per cent lower against the U.S. dollar, setting a new low and putting it into crisis territory.
The previous interest rate was 9.5 per cent. The central bank also temporarily prevented brokers from selling securities held by foreigners.
The preopening turmoil delayed the opening of the Russia equity markets. The central bank said it would announce later Monday when trading would resume. Russia’s benchmark Moex index has fallen 30 per cent so far in local currency terms.
Oil surged again on Monday morning as geopolitical tensions, fuelled by Russia putting its nuclear arsenal on high alert and Belarus potentially opening the door to the placement of Russian nuclear weapons on its soil, intensified dramatically. In London, the FTSE-100 index fell 1 per cent by afternoon while Germany’s Dax slid nearly 1.26 per cent. The FTSE has been on a losing streak since mid-February.
Brent crude, the international benchmark, was up more than 3 per cent in afternoon trading, taking it to US$100.93 a barrel, close to its 52-week high. Brent crude is now up 54 per cent in the last year and inflicting pain on consumers and businesses as gasoline and diesel prices rise.
Natural gas prices were also swinging up again, perhaps because energy traders and investors fear that energy commodities might get caught up in the sanctions war next.
Russia supplies about 40 per cent of Europe’s imported gas – more so in Germany, which has become dependent on Russian gas in recent years. So far the pipeline deliveries have been exempt from sanctions or countersanctions, but that may not last.
Some analysts and economists have raised the possibility of a commodities war as Russian President Vladimir Putin grows angry at Europe for ratcheting up the sanctions against his country virtually every day.
Over the weekend, the United States, Canada, Britain and the European Union cut some Russian banks out of SWIFT, the heart of the global interbank payments network. It also placed sanctions on the Russian Central Bank that are aimed at freezing its US$630-billion in foreign exchange reserves, severely limiting its ability to use foreign cash to prop up the sagging ruble.
In a Monday note, Neil Shearing, chief economist in London at Capital Economics, said “the additional sanctions may prompt retaliation from Russia, which could cut energy imports to Western Europe.”
Royal Bank Capital Markets had a similar view.
“Prices of crude oil and wheat jumped over fears that the sanctions will restrict Russian exports,” RBCM said in a morning note. “There is growing worry that the Western sanctions will eventually hit the energy market too. Moreover, there is a risk that Moscow could seek to retaliate by limiting it energy exports.”
So far, there has been no interruption of Gazprom’s gas supplies to Europe. Gazprom is the Kremlin-controlled gas giant that holds a monopoly on gas exports.
Germany is its single largest customer; Italy and Austria are also highly dependent on Russian gas, which explains their previous reluctance to cut Russia’s banks out of SWIFT. They feared that Gazprom would reduce or eliminate deliveries if its bills went unpaid.
Sanctions were threatening to cripple Russia’s economy and financial markets even as pressure piled up on the country from Western investors.
On Sunday, BP, Norway’s US$1.3-trillion sovereign wealth fund, the world’s biggest, announced it would freeze its investments in Russian assets and begin divesting from Russia. The move came shortly after BP, the former British Petroleum and one of the world’s biggest oil companies, said it would divest its 20 per cent stake in Russian state-controlled Rosneft, the country’s biggest oil producer.
BP did not announce how it would unload its stake. One option would see Rosneft buy it at a steep discount. China has also been mentioned as a possible buyer.
Russian citizens evidently fear that their banks will soon be in trouble. Russians have been lining up to withdraw money from cash machines – the start of a possible bank run.
“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, said in a note.
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