Russia’s central bank signals rate cut, pushes digital ruble

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The Russian central bank Governor Elvira Nabiullina signaled Thursday further interest rate cuts and a push for digital ruble and homegrown credit card system to curb payment issues stemming from Western sanctions over Moscow’s invasion of Ukraine.

Nabiullina also said Russia is looking at adjustments to its foreign exchange controls to avoid situations where the ruble exchange rate deviates in a shadow market from official levels. As she begins her new five-year stint in charge of monetary policy, Nabiullina will have to deal with a full-scale economic crisis, tackling uncertainty stemming from Western sanctions.

The central bank’s emergency rate hike to 20% in late February helped stabilize the ruble and overcome a spike in inflation, Nabiullina said. The bank then cut the interest rate to 17% on April 8. Its next board meeting is on April 29.

“We will consider the possibility of its further reduction at upcoming meetings,” Nabiullina said, speaking in the lower house of parliament, the Duma. She did not say if a cut was likely at next week’s meeting.

Andrei Kostin, head of Russia’s second-largest lender VTB , also targeted by Western sanctions, said on Thursday he expected the central bank to cut the key rate to 15% this month and to 12%-13% by the end of the year, TASS news agency reported.

Inflation in Russia now stands at 17.6% and is on track to accelerate to 22% this year, while the economy is set to shrink by 9.2% in 2022, according to a poll of economists conducted by the central bank in April.

Nabiullina warned that Russia, which saw its strongest economic growth in 13 years in 2021, at 4.7%, will now undergo structural changes as its access to the global financial system and trade are limited by tough Western sanctions.

“Problems may arise even when there is a production with a high degree of localization when there has already been a fairly high import substitution,” Nabiullina said.

For example, she said, Russia produces its own paper but uses foreign bleaching agents, or urgently needs foreign-made packing materials for foodstuff produced in Russia.

“It all takes time,” she said.

The ruble, which has recovered after plunging to an unprecedented level of 150 to the U.S. dollar following the sanctions, is expected to trade at 85 rubles this year, 90 rubles in 2023 and 96 rubles in 2024. It was trading around the 80 to the dollar mark on Thursday.

The country is facing capital flight while grappling with a possible debt default after the West imposed sanctions on banks, businesses and individuals following what Moscow calls a “special military operation” in Ukraine.

Digital ruble, extending Mir system among priorities

With sanctions cutting off Russia from large parts of the global financial system, Moscow is looking for alternative ways to make key payments both at home and abroad.

Nabiullina said the bank plans for real-world “digital” rouble transactions to be possible next year, and that the digital currency could be used in some international settlements.

“The digital ruble is among the priority projects,” Nabiullina said. “We have fairly quickly created a prototype … now we are holding tests with banks and next year we will gradually have pilot transactions.”

Nabiullina also said Russia aims to extend the number of countries that accept Russia’s Mir banking cards, an alternative to VISA and MasterCard, which have joined other Western firms and suspended their operations in Russia.

Mir and China’s UnionPay are among the few options left for Russians to make payments abroad since Russian banks were isolated from the global financial system as part of the sanctions.

Russia, like many other countries around the world, has been developing digital money over the last couple of years to modernize its financial system, speed up payments and head off the threat of cryptocurrencies like bitcoin gaining influence.

The Bahamas was the first to launch a national digital currency back in 2020, while China is the most advanced among major economies having carried out a mass trial of a digital yuan at the Beijing Winter Olympics this year.

Some central bank experts have also suggested the new technologies mean countries would be able to deal more directly with each other, making them less dependent on Western-dominated payment channels such as the SWIFT system.

Meanwhile, efforts by the West to close possible routes for circumventing sanctions continued on Thursday.

The world’s largest cryptocurrency exchange, Binance, said it was deactivating the accounts of Russian nationals and companies based there that hold the equivalent of more than 10,000 euros ($10,900).

Those affected would still be able to withdraw their money, but they will now be banned from making new deposits or trading, a move Binance said was in line with European Union sanctions.

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