Amid reports that thousands of people were trying withdraw cash across Moscow, the Bank of Russia announced it will more than double key interest rates to 20 percent, from 9.5 percent, in an emergency effort to encourage Russians to keep money in their accounts and shore up the economy. Trading on the Moscow Exchange has also been postponed three hours with markets bracing for a turbulent day ahead. The ruble has already plunged to fresh lows this morning, falling 40 percent against the dollar to 117.8. A week ago it had been trading at just over 80 rubles to the dollar.
The hit follows the announcement of sanctions on the Central Bank of Russia over the weekend by the US, UK, EU and Canada.
Sanctions will restrict the central bank being able to access its foreign assets, with around 40 percent of its reserves held in the financial systems of the countries involved.
The reserves take the form of other major currencies such as the dollar and euro, as well as around 2,300 tonnes of gold.
Without access to these reserves the central bank now has limited capacity to try to support the ruble, with the bank announcing on Monday it would resume purchasing gold on domestic markets instead.
Chancellor Rishi Sunak said the sanctions would “demonstrate our steadfast resolve in imposing the highest costs on Russia and to cut her off from the international financial system so long as this conflict persists.”
At the same time certain Russian banks are also being expelled from Swift, an international messaging network used used to support financial transactions.
Expulsion from Swift was previously used as a sanction against Iran in 2012 fuelling a currency depreciation and making key exports such as oil harder.
The rapidly depreciating ruble and restrictions on Russia’s banking system has already sparked fears of a run on the banks, with pictures appearing on social media of large queues forming outside cash machines.
Billionaire hedge fund manager Bill Ackman wrote on Twitter: “I wouldn’t want to keep money in a bank that can’t access the SWIFT system.
“Once a bank can’t transfer or receive funds from other banks, its solvency can be at risk.
“If I were Russian, I would take my money out now.”
In a briefing note Neil Shearing, Group Chief Economist at Capital Economics, wrote: “These are the conditions in which runs on local banks begin.
“The (Central Bank of Russia) has this morning raised interest rates to 20 percent but other measures (e.g. limits on deposit withdrawals) are possible later today.
“All of this will accelerate Russia’s economic downturn – a fall in GDP of ~5 percent now looks likely.”
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On Sunday the central bank appealed for calm, insisting it had sufficient capital and liquidity to continue functioning.
It also said it would use its own network, STFS, for payments within Russia in the absence of Swift.
The rapid decline in the ruble is likely to cause further panic though once trading opens.
In a statement on Monday the Bank of Russia said: “External conditions for the Russian economy have drastically changed.
“The increase of the key rate will ensure a rise in deposit rates to levels needed to compensate for the increased depreciation and inflation risks.
“This is needed to support financial and price stability and protect the savings of citizens from depreciation.”
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