Most of the financial media had been expecting only a 25 basis point rise, and not the 50 point rise that was announced by the Central Bank of Russia on Friday, April 23. The strong move by Central Bank Governor Elvira Nabiullina seems to give credence to the reports EIR received from sources in Russia last week that, after Biden had announced his financial warfare measures on April 15, that this time around (unlike the 2014 run on the ruble) Nabiullina would not burn through Russia’s reserves to try to defend the ruble, but would instead resort to interest rate increases to try to stop capital from fleeing.
Choose your poison: neither measure will work under a concerted financial warfare assault of the sort that Biden threatened.
This is the second rate increase this year by the Russian Central Bank. “The Bank of Russia will consider the necessity of further increases in the key rate at its upcoming meetings,” a Central Bank statement announced. Its next scheduled meeting is in mid-June. Inflation has been accelerating, and hit 5.8% in March (year on year), its highest since 2016.
The question being asked by financial observers is: Who will buy new ruble-denominated government bonds, after Biden’s sanctions kick in in June? The City of London’s Economist, for example, observes that “Russia, trying to spend its way out of the coronavirus crisis, has doubled its offering of state ruble bonds to 5 trillion rubles ($66 billion) this year. Foreign investors and state banks are the main buyers of the bonds, known as OFZs.”
Three state-controlled banks, Sberbank, VTB and Otkritie, hold a total of over 4 trillion rubles, or around a third of all OFZs. VTB has already announced that it intends to buy more bonds. “I am an advocate of an increase in state debt, this is important for economic development,” VTB head Andrey Kostin told Reuters, and continuing that VTB intends to double or triple its current holding of some 300 billion rubles in bonds.