Interest rates

Russia doubles benchmark interest rates as ruble drops 30% (BATS:RSX)

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The financial fallout from the crisis in Ukraine is rapidly intensifying, accompanied by an escalation of violence and fighting across the country. vladimir Putin put Russian nuclear forces on high alert, Belarus is preparing to send troops to Ukraine and a convoy of Russian vehicles surrounds Kiev, although stronger than expected resistance has been observed on the ground. Diplomatic progress is also seen as unlikely as officials from both sides meet today for the first talks since the invasion began, while the EU has upended years of policy by supplying weapons to a ” country at war” for the first time in its history.

The last: Western sanctions plunged the ruble, the currency tumbling 30% overnight to a historic low against the dollar. In response, Russia’s central bank more than doubled its key interest rate to 20%, freed up local banks’ reserves to boost liquidity, and ordered exporters to sell 80% of their earnings in hard currency. In a bid to protect the nation’s assets, brokers have also been temporarily banned from handling securities sales by non-residents, while Russian oligarchs have been put under scrutiny by many Western countries.

All the uncertainty has led to renewed risk aversion, with US stock index futures 2% drop after the big comeback sessions last week. Worries over energy disruption sent crude oil futures in the opposite direction, with contracts climbing 6% at nearly $97/bbl. Risk aversion was also seen elsewhere, as gold futures increased by 1.2% at around $1,910 per troy ounce, the dollar index was advanced 0.8% at 97.368 and the yield on the benchmark 10-year US Treasury fell 10 basis points to 1.87%.

“A bank run has already started in Russia this weekend…and inflation will immediately spike massively, and the Russian banking system is likely to be in trouble,” said Jeffrey Halley, senior market analyst based in Asia at OANDA. “These Western sanctions are likely to harm trade flows out of Russia (about 80% of foreign exchange transactions handled by Russian financial institutions are denominated in USD), which will also harm the growth prospects of Russia’s main trading partners. Russia, including Europe and lead to higher inflationary pressures and risk of stagflation, in our view,” Nomura analysts added.

Accumulation of penalties: Over the weekend, Western governments said they would cut off a number of Russian banks from the SWIFT international payment network and sanctioned certain Central Bank of Russia transactions. This will make it harder for Moscow to shore up the ruble, its economy, and prevent the country from circumventing existing sanctions. Russia has meanwhile sought to quell the panic, saying it has necessary resources and tools – such as $630 billion in foreign exchange reserves – to maintain financial stability, although the S&P has cut its credit rating to “junk”, dealing a blow to the country’s capital markets.