The Board of Directors of the Bank of Russia decided to raise the key rate from February 28, 2022 to 20.00% from 9.50%, the regulator said. At the same time, the Ministry of Finance and the CBR reported that today it will decide to introduce a mandatory sale of foreign currency for exporters from February 28, 2022 in the amount of 80% of proceeds [nR4N2UC04X].

Moscow Exchange said that the ruble exchange rate against foreign currencies is traded in a certain price corridor, the boundaries of which are changed not automatically, as was previously the case, but by decision of the CBR.

The statement of the CBR head Elvira Nabiullina on the results of the board meeting is expected on February 28, 2022 at 16:00 Moscow time.

The following are the comments of analysts (updates are marked with *):

* Vladimir Evstifeev, Zenith Bank:

“The increase in the size of the key rate to 20% looks expected by analogy with the Crimean story of 2014-2015, when the regulator also raised the size of the key rate to 17%. This decision is designed to stop the weakening of the ruble, as well as to convince households and businesses to save in rubles. Ultimately, this should reduce inflationary pressure and slow down the outflow of foreign capital (purchase of currency by Russian residents).

Such a measure is unlikely to be effective now, during the peak periods of the crisis, but as the situation stabilizes, it may accelerate the normalization of financial and foreign exchange market conditions.

Mandatory sale of 80% of foreign currency earnings may support the ruble, but the effectiveness of this measure should not be overestimated either. The volume of currency supply from exporters may amount to an average of $35 billion per month or $25-40 billion per month, taking into account seasonality in foreign trade. This is a significant amount, but a part of it ($10-15 billion) is already sold on the market to pay tax payments”.

ROSBANK analysts:

“The Russian financial system is facing unprecedented stress. The situation on the domestic financial market at the moment is far from any predictability. In the next few hours, the markets will have to assess the flow of negative news accumulated over the weekend, but even taking into account the “dosed” launch of trading sessions by the Moscow Exchange, it will hardly be possible to assess the fair value of the materialized risk in the coming days.

The main event was the introduction of restrictions on the disposal of the Bank of Russia’s foreign currency reserves by the European Union, the UK and a number of other countries. Based on the data available as of July 1, 2021, such a measure is equivalent to a 54% reduction in the reserves available for disposal, or up to $270 billion at the prices at that time – the bulk of which is physical gold, yuan and a number of other currencies. Of course, the currency structure may have changed by now, and a larger pool of foreign cash may have been created, but this information is not available in the regulator’s releases on reserves at later dates.

Given the developments, a number of decisions were taken today:

1. The key rate was raised to 20% per annum – this measure is long-awaited and necessary to buy negative sentiment among holders of ruble deposits and current accounts. It should be expected that the banking system will be forced to raise short-term deposit rates to comparable levels in order to minimize the outflow of funds.

2. The Central Bank and the Ministry of Finance agreed on a decision on the mandatory sale of 80% of foreign currency earnings by Russian exporters. De facto, it is this step that will replace the intervention mechanisms of the Bank of Russia in the near future.

The situation on the financial markets and the regulator’s reaction remain in direct dependence on geopolitical processes and subsequent decisions on de-escalation of the situation in Ukraine and sanctions pressure on Russia”.

MMI Telegram channel analysts:

“What, in our opinion, could have been taken into account when deciding to raise the rate?

– The current situation looks worse than in 2014, which requires more decisive action than then

– Outflow of people’s funds from banks – apparently higher than 8 years ago (although we do not have exact figures, but we think we are talking about amounts of more than 2 trillion rubles)

– While the fighting is going on, the pressure on the markets and economy will only increase, new sanctions will be imposed, already imposed ones will be expanded (the same SDN-list may cover new banks, as well as restrictions on the use of SWIFT).

– The Central Bank accompanied the rate hike with a neutral signal (“will make further decisions on the key rate based on the assessment of risks…”); this means that further rate movement can be either up or down. Everything here will depend on the news from Ukraine….

We believe that the Central Bank did everything absolutely right. The main point of such a strong rate hike is to stop the outflow of household funds from banks and prevent a strong devaluation of the ruble. If this does not work (not everything depends on the Central Bank), the Central Bank will have to raise the rate again.

So far, the reaction looks alarming – after the initial sharp strengthening of the ruble (from 107 to 101), the rate has turned around again and is now approaching 109 …”

Victor Grigoriev, Bank of St. Petersburg:

“This morning the Bank of Russia announced new measures to support the Russian market and economy. The key rate was raised today to 20% per annum at once, and the rule of mandatory sale of 80% of foreign currency earnings was introduced. Such decisions of the regulator seem reasonable and necessary in the current situation, and should limit further significant weakening of the ruble. Given the current market situation, it is difficult to assess the impact of the Central Bank’s actions on the ruble, but on the whole the probability of USDRUB rate fixing above 110 RUB/$ has decreased. Nevertheless, the risks for Russian assets remain high, and as the geopolitical situation develops, the USDRUB exchange rate may continue its growth even in the conditions of increased support from the Central Bank – the dynamics of Russian assets will now be entirely determined by geopolitical news”.

Dmitry Kharlampiev, Sinara Investment Bank:

“The decision to raise the key rate by 10.5 p.p. to 20% on 28.02 the regulator motivated by actual changes in external economic conditions for the Russian Federation, as well as the desire to maintain financial price stability, to protect the savings of the population from depreciation as a result of inflation and devaluation. It cannot be said that the decision on unscheduled serious tightening of the CDA is completely unexpected, given the market conditions, general economic conditions, as well as the experience of such stabilizing decisions in the previous period.

The introduction of the norm of mandatory sale of foreign currency proceeds is also quite justified measure in the current, one can say, exceptional conditions, which previously, in periods of turbulence, demonstrated quite high efficiency, allowing to expand the volume of foreign currency supply in the domestic market. At this stage, taking into account the current export volumes, this could mean up to $2 billion in additional sales per trading day”.

Dmitry Polevoy, Loco Invest:

“Following the imposition of restrictions on the Central Bank’s international reserves by major Western countries, which limited its ability to directly support the ruble exchange rate, the regulator together with the Ministry of Finance announced additional measures:

– raising the key rate to 20% to increase the attractiveness of ruble deposits in banks for households/businesses and to prevent banking panic;

– introduction of mandatory sale of 80% of foreign currency earnings by exporters, whose funds will be the main source of support for the ruble exchange rate at the moment;

–

introduction of a corridor of fluctuations in the ruble exchange rate against foreign currencies (initially USD/RUB at 76.145-90.000 and EUR/RUB at 85.615-101.1925), which will be shifted and, apparently, have already been shifted (judging by the quotes) after the introduction of this instrument by decision of the Central Bank.

What does it mean?

– The Central Bank’s decisions are designed to prevent destabilization of the ruble segment of the banking system and the financial market, to increase the propensity to save among the population/companies in rubles and to limit the “panic” demand for currency. The absolute priority for the Central Bank remains the creation of conditions for smooth operation of the banking system and financial market together with limiting market volatility of the exchange rate.

– According to our rough estimates, total exports of goods/services in 2022 (excluding possible reduction in physical volumes of deliveries of key commodities) at Urals oil prices of around US$95-100/bbl. may amount to around US$700-730 bn or US$55-60 bn per month, which would provide a supply of currency in the amount of US$44-48 bn. This looks sufficient to stabilize the market in the coming weeks.

– With the ban on liquidation of financial positions by non-residents, this should help stabilize the ruble exchange rate. But if the demand for currency remains high and/or financial sanctions continue to tighten, the CBR has the option to impose additional restrictions on capital flows – for example, a ban/restriction on dividend payments or early repayment of foreign loans to foreign subsidiaries/mother companies and investors in financial instruments. But the restrictions imposed may be gradually lifted as the situation becomes clearer/stabilized in the markets.

– Under the current conditions, the transmission of rate decisions into deposit/credit rates (i.e. their increase by banks) together with the probable growth of risk appetite on the part of banks in terms of lending (tightening of requirements to borrowers) will allow to limit inflation risks through the impact on domestic demand.

– Timely and transparent communication between the Central Bank and the government is an extremely important element of the effectiveness of the decisions taken by the regulators.

What should investors do?

– Volatility of quotations on the currency and financial market will remain high in the near future, so over-emotional decisions may lead to additional losses.

– Under current conditions, the Central Bank has enough tools to ensure stability of the ruble segment of the banking system and safety of accounts/savings in rubles, and the absence of panic among depositors is an important prerequisite for the success of these measures.

– The uncertainty of the further development of the sanctions situation does not allow us to give any definite forecasts on the further actions of the Central Bank and the impact of what is happening on financial assets, but in case of deterioration of the situation we do not exclude that decisions may be taken to support the Central Bank/financial authorities quotations of OFZ and shares of major companies”.

Dmitry Monastyrshin, Promsvyazbank:

“The regulator’s main goal in raising the rate to such a high level was to increase the attractiveness of ruble deposits and stop the outflow of deposits from the banking system. In the near future, we should expect the rates on short deposits in commercial banks to rise to 18-20%. Rates on long deposits are likely to be at the level of 10-15% due to expectations of lower rates in the medium term.

Loan rates for households and businesses will also rise. Not all borrowers will be able to service loans at rates above 20%, so we expect a slowdown in lending and an increase in defaults among borrowers with high debt load.

OFZ yields will rise to the level of the key rate. The growth of credit risks will lead to widening of spreads in corporate bonds to OFZ.

The CBR has not given a signal on the further direction of the rate movement. It can be both its increase in case of deterioration of the situation, and decrease of the rate in case of stabilization of ruble exchange rate and stopping of outflow of clients’ funds from banks”.

BCS analysts:

“The sharp rise in the Central Bank rate is due to record pressure on the currency. This is one of the tools we considered a few hours ago. The sale of exporters’ foreign currency earnings was not excluded either.

The regulator’s step is absolutely correct, caused by abnormal market volatility on the background of EU and US sanctions. The impact is purely positive. Stabilization should come, and the ruble should strengthen on the background of pumping liquidity into the system”