The Russian central bank has purchased millions of roubles to prevent the collapse of the Moscow stock exchange and prop up the currency after it plunged to an all-time low of 89.60 against the dollar.
In a scramble to prevent the invasion of Ukraine pushing Russia’s financial system into meltdown, officials in Moscow closed the stock exchange while the Bank of Russia mounted a rescue operation to put a floor under the skidding rouble.
By midday, the stock market had reopened and the rouble recovered to trade at 84 to the dollar, though late in the day it climbed back to 87 and analysts said an escalation of the war could force the central bank to intervene further to prevent the currency sinking even lower.
“To stabilise the situation on the financial market, the Bank of Russia decided to start interventions on the currency market,” the central bank said.
Russia’s main stock exchange fell 30% after reopening, falling from 3,000 to 2,000 points, while the MSCI index of shares in Russian companies traded in London and New York dropped by 45%.
Kremlin spokesperson Dmitry Peskov said Russia had created a financial safety net to withstand market volatility and said the “emotional” reaction of the financial markets to Russia’s invasion of Ukraine would even out. He added that all necessary measures were being taken to ensure the market reaction was as brief as possible.
After weeks of denying plans to attack Ukraine, Russian forces fired missiles at several Ukrainian cities and landed troops on its coast, prompting analysts to predict that severe pressure on global financial markets was likely to persist over the coming weeks.
Russia’s currency, bonds and stocks all sank before its central bank announced its first foreign exchange intervention to shore up financial stability since 2014, when the country annexed Crimea from Ukraine.
Russia holds a formidable war chest of more than $600bn (£450bn) in foreign-exchange reserves and gold that it can use in currency markets to prop up the rouble.
A rapidly depreciating currency makes it harder to pay off foreign debts and leads to higher prices on imported goods and lower returns on exports.
Officials at the Bank of Russia are understood to have sold foreign reserves to buy roubles to put a floor under the price, though the extent of the buying operation is not yet clear.
One of the biggest falls in the value of the rouble was against the euro. Before the recent round of geopolitical tensions between Moscow and the west began to escalate in October, the rouble was trading at around 80 to the euro. It is now heading towards 90.
Susannah Streeter, senior investment and markets analyst at stockbroker Hargreaves Lansdown, said: “Market volatility has increased since the beginning of the year, stoked by rising interest rates, and today’s news has added fuel to the market turbulence.”
As the US said it may cut off Russia’s top banks from dollar transactions if Moscow moves its troops into Ukraine, data showed in December that Russian banks brought $5bn in foreign exchange back to Moscow and moved some of their long-term foreign exchange holdings into more liquid assets if needed in an emergency.
To support Russian commercial banks under pressure from falling share prices and western sanctions, the central bank increased the daily amount of roubles it would swap for dollars from $3bn to $5bn. This will allow commercial banks to replenish the dollar stocks needed to repay foreign debts.
The Bank of Russia also expanded the list of securities it accepts as collateral in exchange for the liquidity it provides.
Markets are now bracing for the impact of fresh harsh western sanctions to punish Moscow for the invasion of Ukraine.
“The sanctions hit is going to be significant, unlike the soft sanctions imposed on Tuesday and Wednesday,” said the investment firm Renaissance Capital.
The effective interest rate on Russian government debt soared to almost 10% as bond investors sold heavily to seek safer havens, although the effect is expected to be limited as most of the debt is held by domestic financial institutions.
Ukraine’s government debt collapsed in value, pushing the country towards a further bailout by the International Monetary Fund.
The Washington-based lender of last resort said this week it was poised to start a virtual mission to Ukraine with a view to releasing $700m in aid.
Since 2014, the IMF has committed more than $20bn in loans to Ukraine in a series of bailouts, though in 2019 it demanded that Volodymyr Zelenskiy’s government show it would aggressively try to recoup an estimated $15bn that was stolen from more than 100 banks, including the country’s largest, PrivatBank, over the previous decade before a further $4bn was released.
The Russian central bank is expected to ease pressure on the rouble further by increasing its main interest rate, which it hopes will lure back foreign investors searching for high returns.
The bank is also expected to continue monetary tightening by raising interest rates as it struggles to rein in inflation, which is set to worsen from the falling rouble.
