The Russian central bank is reacting to the currency crisis resulting from western sanctions with a drastic interest rate hike. The key interest rate will rise from 9.5 to 20 percent, as the monetary authorities announced in Moscow on Monday. “This is necessary to support financial and price stability and to protect citizens’ savings from falling in value,” the statement said. At the same time, the central bank signaled its readiness for further hikes. Central bank chief Elvira Nabiullina wants to explain the measures during the day at a press conference.
Russia’s escalating conflict with the West following its invasion of Ukraine caused the country’s currency to plummet. In particular, the freezing of the foreign exchange reserves of the Russian central bank had an effect. Conversely, the dollar temporarily rose almost 42 percent on Monday to a record high of 119 rubles. “The external conditions for the Russian economy have changed drastically,” emphasized the central bank. Higher interest rates can help stabilize the exchange rate and also curb inflation, but they also make loans more expensive – for investments, for example. This, in turn, is likely to weigh heavily on the economy.
Domestic companies should also sell 80 percent of their foreign exchange earnings, the central bank and the Ministry of Finance announced in a further step. The authorities have also ordered brokers to suspend short selling in the Russian market and stop executing orders from foreign legal entities and individuals to sell Russian securities.
Economists doubt whether the actions will be enough to stabilize the currency. “The interest rate hike by the Russian central bank is intended to make deposits in rubles more attractive and curb the capital flight that is now beginning,” said economist Friedrich Heinemann from the Center for European Economic Research (ZEW). “This will hardly succeed. With the comprehensive sanctions, the ruble has ceased to be a freely convertible currency.”
monetary fiasco
In terms of monetary policy, Russia will be thrown back to the early 1990s. The country can, to a limited extent, maintain international transactions with the help of countries willing to cooperate and alternative payment systems. “But the people who are now queuing in front of the ATMs know that the ruble is no longer a valuable and internationally usable currency,” said Heinemann. “Russian assets and the ruble have suddenly become junk on the financial markets with the Russian invasion of Ukraine.”
The Belarusian central bank also raised its key interest rate significantly in view of the western sanctions against neighboring Russia. The central bank announced that the key interest rate would rise from 9.25 to 12.0 percent. The move is intended to preserve financial stability and limit the risk of accelerated inflation. Belarus is allied with Russia and allows Russian troops to invade Ukraine.
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