The Bank of Russia raised its key rate from 9.5% to a record 20% per annum. The regulator explains the tightening of monetary policy by fighting the risks of rising prices and protecting the savings of the population in the face of external volatility. At the same time, in order to maintain financial stability, the Central Bank (CB) and the Ministry of Finance agreed on a requirement for exporters to obligately sell 80% of foreign exchange earnings under foreign trade contracts, and transactions for the withdrawal of ruble assets have also been frozen. Emergency measures in the short term should stabilize the exchange rate in the context of freezing the assets of the Central Bank, but on a longer horizon, the return of currency control is pointless as a permanent solution – the “Iranian” scheme of work for such an economy is unlikely to be workable.
At an unscheduled meeting, the Board of Directors of the Bank of Russia decided to sharply raise the key rate by 10.6 basis points at once, to 20%. The Central Bank explains its decision by maintaining financial and price stability – thereby, the regulator intends to ensure the growth of “deposit rates to the levels necessary to compensate for the increased devaluation and inflation risks.”
The rate hike was required due to a “drastic” change in external conditions – earlier the decision to sharply raise the rate (from 10.5% to 17%) was taken at the end of 2014 against the backdrop of an escalation of the conflict over Ukraine. The measures were also motivated by the need to support the Russian currency – while the rate soon began to decline, as it threatened a sharp increase in bond yields, a decrease in the availability of credit for businesses and a slowdown in the economic recovery.
In response to Russia’s military operation in Ukraine, the ruble has already collapsed to a historic low on the OTC Forex market, and during the morning session on the Moscow Exchange, the dollar rose from 83 rubles. up to 90 rubles, and the euro – from 93 rubles. up to 101 rubles
Yesterday, we recall, the EU agreed to freeze the assets of the Central Bank – today the European authorities specified that the measure would affect “about half or more of the financial reserves of the Central Bank.” We are talking about a ban on operations related to the management of reserves, as well as assets of the Central Bank, including operations with any legal entities and organizations acting on behalf of or on behalf of the Central Bank. These measures have closed the possibility of clearing settlements of sanctioned banks through the Central Bank, at least in euros.
Previously, it was thought that the sanctioned banks (about 70% of the entire banking system) would be able to conduct foreign exchange settlements through the accounts of the Central Bank, since direct payments in foreign currency in favor of such banks are considered toxic and threaten to impose sanctions on the payers themselves. Following the EU, the UK also announced that it would ban financial transactions with the Central Bank and the Russian Ministry of Finance.
De facto, the foreign exchange component of Russian reserves, not excluding the NWF, has been frozen almost completely. Alternative schemes of operations with them can hardly be developed instantly, restrictions on reserves – even taking into account the experience of Iran, the decision is unprecedented, no one in Russia was clearly preparing for it.
According to the Bank of Russia, further decisions on the key rate will depend on the assessment of risks from external and internal conditions, as well as the reaction of financial markets to them, and taking into account the actual and expected inflation dynamics relative to the target.
To maintain financial stability and provide foreign exchange reserves, the Central Bank and the Ministry of Finance agreed on a decision to introduce, from February 28, a requirement for the mandatory sale of 80% of foreign exchange earnings.
Until now, the financial authorities have been engaged in a phased liberalization of currency regulation – such requirements were in effect from 1992 to 2006 (at the same time, the sales ratio was reduced from 50% to 10% by 2004). However, the Central Bank considered it unnecessary to artificially maintain the supply of foreign currency, since exporters in any case sell much more foreign currency on the domestic market than according to the mandatory sale requirement: they need rubles to pay taxes, pay salaries and make investments.
Let us recall that the decision of the Central Bank of the Russian Federation to abolish the requirement for the mandatory sale of foreign exchange earnings came into force in May 2006 as a step towards the liberalization of foreign exchange regulation and the achievement of full ruble convertibility. The decision put an end to the long history of this type of currency regulation.
Mandatory sale of a part of foreign exchange earnings by exporters was introduced on January 1, 1992 by President Boris Yeltsin’s decree on the liberalization of foreign economic activity. At first, 40% of the proceeds went to the republican foreign exchange reserve at a special rate, 10% – to the formation of a foreign exchange reserve (GFR) of the Central Bank. On July 1, 1992, the republican foreign exchange reserve and the special rate were liquidated, all 50% of foreign exchange earnings were ordered to be sold on the domestic market according to the rules established by the Central Bank. At first, 20% was sold on the domestic market, and 30% – directly to the Central Bank to replenish gold reserves. On July 1, 1993, the Central Bank allowed the sale of all 50% of the proceeds in the foreign exchange market.
After the 1998 crisis, in order to replenish foreign exchange reserves and stabilize the State Duma approved an increase in the standard from 50% to 75%. Then, in July 2001, when, thanks to high oil prices, the flow of petrodollars began to flow into the country, it was decided to reduce the standard again to 50%.
In 2003, after the adoption of a new version of the law on currency regulation, which established that this type of regulation was canceled from 2007, the Central Bank lowered the standard to 25%. But this turned out to be a lot. In November 2004, the Central Bank lowered the sales ratio to 10%. In 2006, when rising oil prices ensured a huge positive balance of payments and a rapid growth in foreign exchange reserves, the Central Bank considered that there was no need to maintain an artificial supply of currency.
The Central Bank is also trying to restrain the withdrawal of non-residents from Russian assets – for this, a temporary ban has been introduced for brokers to carry out transactions for the sale of securities on behalf of foreign legal entities and individuals.
The decision to completely get rid of Russian assets was announced by the Norwegian sovereign wealth fund (the largest in the world, with $1.3 trillion in assets), and the Canadian Pension Fund of Quebec managed to sell Russian securities.
In fact, after the decision of the Central Bank, the stock market is artificially divided into two parts, normal pricing in it is now impossible – as, indeed, in all markets of the Russian Federation. It should be noted that the response scheme of the Ministry of Finance and the Central Bank to what is happening is standard, and the emergency introduction of currency control returns to the Russian Federation the scheme of work of Iranian financial institutions during the sanctions against the local national bank from Europe and the United States – but in a constant mode, the Russian economy, much more globalized than in Iran in 1980-1990, clearly cannot work. If there is a permanent solution for the Russian financial markets in this situation, it will be different from what is currently being applied.