Russia hikes interest rates as rouble plunges

Russia’s central bank has doubled interest rates to 20%, as the rouble crashed to historic lows against the dollar.

In an emergency announcement on Monday, the Central Bank of the Russian Federation increased rates from 9.5%. It 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 citizens’ savings from depreciation."

The bank, in conjunction with the finance ministry, also ordered Russian exporting companies to sell 80% of their foreign currency.

The CBR is looking to contain the fallout from a slew of economic and financial sanctions imposed on Russia over the weekend by the US and European Union, and on Monday by the UK. The Russian stock market was also ordered to delay opening.

The sanctions contributed to the rouble crashing as trading got underway for the first time since the Western allies tightened sanctions. As at 0800 GMT, the rouble had lost around 22% to around 106 against the dollar.

The sanctions include the unusual step of targeting Russia’s central bank directly. On Monday, the UK government said it would prohibit UK persons from undertaking financial transactions involving the CBR, the Russian National Wealth Fund and the ministry of finance. It will also impose restrictions against Russian financial institutions.

It said: "This action is taken to prevent the CBR from deploying its foreign reserves in ways that undermine the impact of sanctions imposed by us and our allies, and to undercut its ability to engage in foreign exchange transactions to support the Russian rouble."

Lee Hardman, currency analyst at MUFG, said: "The negative FX market reaction for the rouble reflects the decision by Western leaders to impose the most severe sanctions on Russia’s economy.

"After some initial reluctance, the Western powers have finally decided to remove some of Russia’s lenders from the Swift global financial messaging system.

"On top of that, the Western powers have decided to place sanctions on the CBR, which could prove even more destabilising for Russia’s financial system and economy. It is the first time that a G20 central bank has been sanctioned before.

"If the sanctions prove effective at limiting access to the large reserve stockpile, they will also limit the CBR’s ability to support its economy, financial system and the rouble. We believe the rouble was supported last week by heavy intervention from the CBR. The weaker rouble will result in even more elevated inflation dealing a further blow to Russia’s economy."

Russia has built up foreign reserves of around $640bn.