Russia's Central Bank more than doubled its key policy rate on Monday and introduced some capital controls as the country faces deepening economic isolation. But his central bank governor said sanctions had stopped him from selling foreign currency to prop up the ruble.
The acknowledgment that restrictions have effectively tied the Bank of Russia's hands underscores the ferocity of the backlash against Moscow's invasion of Ukraine and the success of its Western allies in limiting its ability to deploy some $640 billion of foreign exchange and gold reserves.
"The central bank today raised its main interest rate to 20% as new sanctions trigger a significant deviation from the ruble exchange rate and limit the central bank's options for using gold and its foreign exchange reserves," Governor Elvira Nabiullina said at a press conference.
"We have to raise tariffs (to) compensate citizens for the increased risk of inflation."
Previous Western sanctions had sent the ruble tumbling nearly 30% to a record low. It bounced back after the central bank raised its key interest rate to 20%, the highest level this century, from 9.5%.
The Russian bank sold $1 billion in the foreign exchange market on Thursday, Nabiullina said, but did not intervene on Monday.
"Given the restrictions on the use of gold and foreign exchange reserves in dollars and euros, we are not intervening today," Nabiullina said.
That suggests that the ruble is being supported by another unnamed market participant.
On Monday, the central bank and finance ministry said they would order exporting firms, which include some of the world's largest energy producers from Gazprom to Rosneft, to sell 80% of their forex earnings on the market, as the central bank's own ability to intervene in currency markets restricted.
The United States and the United Kingdom prohibit their citizens or entities from transacting with the central bank, Russia's National Wealth Fund, or the Russian ministry of finance.
Switzerland has said it will adopt EU sanctions against Russia involved in the invasion of Ukraine and freeze their assets, in defiance of the tradition of a neutral country.
Major Russian banks have also been excluded from the SWIFT messaging network that facilitates trillions of dollars' worth of financial transactions around the world, making it difficult for lenders and companies to make and receive payments.
Nabiullina said Russia had an internal replacement for SWIFT that could connect with foreign counterparts, but gave no details.
He said the banking sector was facing a "structural liquidity deficit" due to high demand for cash, and the central bank was ready to support it.
"The central bank will be flexible to use any tools needed ... the bank has sufficient scope to raise funds from the central bank," Nabiullina said.
Russians had been queuing outside ATMs on Sunday, worried the sanctions could trigger a cash shortage and disrupt payments.
All banks will fulfill their obligations and the funds in their accounts are safe, Nabiullina said, although the central bank recommended that banks restructure the loans of some clients.
The European arm of Sberbank, Russia's biggest lender, will fail, the European Central Bank warned on Monday, after a drop in deposits triggered by a backlash from Russia's invasion of Ukraine.
Nabiullina said further monetary policy decisions would be driven by the central bank's assessment of external risks, adding that it would be flexible in its decisions given the "non-standard situation" faced by the financial system and economy.
He was speaking as ceasefire talks between Russian and Ukrainian officials began at the Belarusian border.
The ruble traded down about 18% in afternoon trade. Russian stock markets and derivatives markets closed to face further losses.
Nomura analysts said in a note to clients that new retaliatory measures by the West against Russia would likely have wider global implications.
"These sanctions from the West are likely to ultimately hurt trade flows out of Russia (about 80% of FX transactions handled by Russian financial institutions are denominated in USD), which will also hurt the growth prospects of Russia's main trading partners including Europe and lead to inflationary pressures. greater risk of stagflation, we think," they wrote.
Announcing the rate hike early Monday, the central bank acknowledged that "external conditions for the Russian economy have changed drastically".
It also temporarily barred Russian brokers from selling securities held by foreigners, although it did not specify which assets the ban applies to.
Other emergency measures announced on Sunday and Monday included assurances that the central bank would resume buying gold on the domestic market.
On Monday, it sold 3.04 trillion rubles ($28.3 billion) at an indefinite "adjusting" repo auction to help banks with their liquidity.
Finance Minister Anton Siluanov said the government is ready to strengthen the capital of commercial banks if needed.
Orders for Russian brokers to refuse sell orders for Russian securities from foreign clients could complicate plans for Norwegian and Australian sovereign wealth funds to reduce exposure to companies listed in Russia.
It's also unclear how energy giant BP, Russia's biggest foreign investor, will follow through on its decision to leave its stake in state oil company Rosneft at a cost of up to $25 billion.
Global bank HSBC and the world's largest aircraft leasing company AerCap are among other Western companies seeking to exit Russia over its actions in Ukraine, which Moscow has characterized as "special operations".
