Economic Watch Reporter Hu Yanming The Russia-Ukraine conflict has disturbed global financial markets. On February 26, the global markets were shaken after the U.S., Europe and other countries issued a joint statement deciding to impose economic sanctions on Russia and announced the exclusion of some Russian financial institutions from the Society for Worldwide Interbank Financial Communications (SWIFT) system.
European stock markets opened lower on Monday, Feb. 28; oil, gas and other energy commodities surged; and the Russian ruble faced pressure to depreciate, with the ruble plunging nearly 30% against the dollar offshore.
The Russian authorities responded quickly, with announcements on February 28th local time that the opening of the Russian exchange was postponed; the Central Bank of Russia raised interest rates sharply to 20%, and the Ministry of Finance also imposed mandatory foreign exchange sales on companies.
Ruble devaluation hits 30 percent
The Russian Exchange announced in the morning of February 28 that according to the decision of the Bank of Russia, foreign exchange, currency market and repo trading on the Moscow Exchange will start at 10:00 Moscow time on February 28. This time is 3 hours later than the usual market opening time.
At the same time, the Central Bank of Russia said that the start of trading on the day in the markets for stocks, financial futures and derivative financial instruments will be announced separately, and the decision on whether to open trading will be announced by the Bank of Russia at 13:00 Moscow time. But subsequently, the Bank of Russia decided not to open trading in stocks on that day.
Prior to that, one of the features of the Moscow Exchange was the long opening trading hours, which since March 2021 have been 06:50 to 23:40 for the Moscow Exchange stock market and 07:00 to 23:50 for the foreign exchange, precious metals and derivatives markets, with almost 17 hours of trading.
Russia's central bank previously said it would increase cash supply automated teller machines (ATMs) to meet demand and promised to provide rubles to banks without interruption. But the ruble's depreciation intensified as the Russia-Ukraine conflict escalated. On Feb. 27, the ruble touched a low of 120 against the dollar on the electronic currency trading platform EBS.
(USD-RUB chart Source: Moscow Exchange)
After the market opened on the 28th, the dollar quickly jumped to 90 against the ruble from the previous closing price of 83, and has since climbed all the way to a high point of 108.13, with a devaluation of 30%.
As of press time, at 16:24 Moscow time (21:24 Beijing time), the dollar stood at 97.07 against the ruble, a depreciation of 16.9%.
Emergency interest rate hike raises key rate to 20%
After the market opened on the 28th, the Bank of Russia announced on its official website that it had urgently raised the Key Rate (Key Rate) from 9.5% to 20%.
The key interest rate can also be considered the Bank of Russia's benchmark interest rate, which, according to the Bank of Russia's official website, is the main tool of the Bank's monetary policy. The Bank of Russia determines the level of the key interest rate in order to achieve its monetary policy objective of keeping the annual inflation rate close to 4%. in January 2022, Russia's inflation rate was 8.7%
In the announcement, the Bank of Russia said that the Russian economy is facing dramatic changes in external conditions, raising key interest rates to protect the level of interest rates on deposits in order to cope with the devaluation of the local currency and inflation risks, maintain financial and price stability, and protect people's savings.
In terms of banks, Alfa-Bank, one of the main commercial banks in Russia, for example, as of 16:00 local time on February 28, its official website announced an interest rate of 8% on deposits and 8.5% on deposits for new accounts.
(Photo credit: Alfa-Bank)
The Bank of Russia also said that it will further assess the internal and external risks, financial market reactions and changes in inflation levels and continue to take appropriate measures for key interest rates.
(Based on data from the official website of the Bank of Russia)
The key rate of 20% is also the highest rate announced by the RBI in recent years, with the previous high coming in December 2014, when the RBI also urgently raised the key rate from 10.5% to 17% in response to the plummeting ruble exchange rate.
As a rule, the Bank of Russia Board of Directors' key rate meeting is held eight times a year to set key interest rates, including four quarterly core meetings, and four ad hoc meetings. This emergency rate hike is not among the scheduled eight Bank of Russia Board of Directors' key rate meetings.
The Bank of Russia announces key interest rate decisions based on macroeconomic forecasts, which include inflation forecasts. Therefore, the process of preparation and revision of the Bank of Russia forecasts and related analytical materials is called joint forecasting round (JFR). The joint forecasting is carried out by a team of experts consisting of analysts and specialists from various departments and regional branches of the Bank of Russia, the work of which is coordinated by the Monetary Policy Department.
The significant 1,050 basis point increase in key interest rates by the Bank of Russia was followed by the Russian Ministry of Finance's imposition of mandatory foreign exchange sales regulations on companies, requiring them to sell 80% of their foreign exchange earnings.
As of press time, Russia and Ukraine have been in talks. It remains to be seen whether Russia can defuse Western financial sanctions and stop the ruble's devaluation and capital outflow.