Oil and gold prices jump, Russian central bank hikes rates as rouble plummets – business live

• 8.44am GMT 08:44 European defence stocks jump
• 7.31am GMT 07:31 Introduction: Russian central bank hikes rates as rouble plummets, oil and gold prices jump

07:31

Updated at 7.47am GMT

Markets.com analyst Neil Wilson said:

Markets are digesting a raft of fresh sanctions that landed over the weekend: Swift ban, Russian central bank assets frozen, flight bans and all sorts. We have also seen an incredible turnaround in German post-war military restraint as it announced plans to increase the defence budget by €100bn this year.

Hensoldt, a German aerospace and defence supplier, jumped 87%, whilst Rheinmetall rallied almost 50%. Other defence stocks rose handsomely: BAE Systems rallied 13% and Leonardo in Italy climbed 15%. Look for [US companies] Lockheed Martin and Raytheon later on.

Travel bans and air space restrictions left travel stocks down: Tui –5%, [British Airways owner] IAG –3% in early trade.

European banks were broadly lower as investors de-risked from institutions with direct exposure to the Russian economy; Deutsche Bank and Commerzbank both -7%, SocGen and BNP Paribas -8-9%. Sberbank was warning on outflows, ECB says its European branches face collapse. Restriction on Russia + possible retaliation = slower growth for Europe.

London-listed Russian companies are also sharply lower. The Anglo-Russian miner Polymetal and the Russian steelmaker Evraz are once again the two biggest fallers on the FTSE 100, down 44.5% and nearly 20% respectively.

European defence stocks have jumped after the German chancellor Olaf Scholz announced a dramatic increase in military spending, following Russia’s invasion of Ukraine.

Military spending will rise to more than 2% of GDP, in a dramatic shift in German policy (it is estimated to have been 1.5% last year). Germany has long resisted pressure from the US to increase its defence spending in light of its role in 20th century history (the two world wars), and amid strong pacifism among its population.

Shares in Germany’s arms manufacturer Rheinmetall jumped as much as 48%, Italy’s Leonardo rose 17%, France’s Thales 11% and the UK’s BAE gained more than 13%, making it the top riser on the FTSE 100 index of bluechip companies.

Analysts at ING said Russians are very sensitive to the dollar-rouble exchange rate and “clearly the current rouble decline is hitting home”. Turning to the Russian central bank’s emergency measures:

This looks like a package of measures to defend the rouble including new mandatory sales of 80% of FX revenues for Russian companies. This latter measure looks to prevent the kind of FX hoarding seen during the Crimea crisis of 2014, when Russian energy companies were alleged to have held onto FX earnings and contributed to heavy RUB losses during that period. Additionally, the CBR has temporarily suspended the sale of Russian assets by non-residents. This comes as companies like BP and the Norwegian sovereign wealth fund announce plans to divest Russian assets.

With Western nations moving to extreme sanctions very quickly - e.g. measures to sanction the CBR are now starting to draw parallels with Iran - investors will be nervous that Western leaders bite the bullet and consider whether exposure to Russian oil and gas supplies comes into focus, too. What is clear is that commodity prices, (gas, oil, certain precious/industrial metals and softs such as wheat) will continue to rise and this supply shock should be a negative for activity and equities.

Suffice to say that the dollar should continue to be the preferred safe haven in these unprecedented times.

The European bourses have opened with declines of between 1% and 2%.

• UK’s FTSE 100 down 1% at 7,412, a loss of 77 points
• Germany’s Dax down nearly 2% at 14,277
• France’s CAC down 2% at 6,616
• Italy’s FTSE MiB down 2% at 25,240

Talks between officials from Russia and Ukraine are expected to begin at 12pm local time (9am GMT) near the border. The Ukrainian president, Volodymyr Zelenskiy, was not hugely optimistic yesterday but said: “Let them try so that later not a single citizen of Ukraine has any doubt that I, as president, tried to stop the war.”

Defence ministers from the European Union will meet virtually later today to coordinate their assistance (in the form of arms deliveries) to Ukraine, after the bloc decided for the first time to jointly fund weapons and send them to Kyiv, according to the EU foreign policy chief Josep Borrell.

You can catch up on the latest developments on our Ukraine crisis live blog:

The earlier sharp declines in the rouble were in Asian trading. On the Moscow exchange, the rouble initially fell 15% to 95.48 per dollar before extending losses to 21.6%, taking the rouble to 100.96 per dollar.

Neil Shearing, group chief economist at Capital Economics, is predicting a decline in Russian GDP of about 5% this year. He said about the exclusion of some Russian banks from the Swift payments system:

The list of institutions affected has yet to be released, but when it is it’s worth watching whether Gazprombank is included (since it handles a large share of Russia’s energy exports this could have implications for energy flows). However, so far at least the West has stopped short of a ban on energy imports from Russia, which would be the most powerful sanctions they could implement.

He has also looked at the impact of sanctions on the Central Bank of Russia (CBR).

This is perhaps a more significant move since it will substantially reduce the ability of the CBR to liquidate its foreign assets to support the ruble and help Russian firms service FX-denominated liabilities. Around 40% of Russia’s international reserves are held in the financial systems of the countries that have signed up to these sanctions.

Key areas to watch going forward are whether the US adds the CBR to its “Specially Designated Nationals” list, which would ban US entities from dealing with the central bank and therefore acting on its behalf, and whether the US introduces ‘secondary sanctions’ that would affect any foreign entity dealing with the CBR. Another key area to watch is whether the CBR sanctions contain a carve out for sovereign debt repayments (we expect that they will).

The sanctions have caused turmoil in Russia’s financial markets, with the rouble opening down 30% against the dollar in offshore trading and falling by much more (~70%) on local retail currency exchanges. These are the conditions in which runs on local banks begin.

The CBR has this morning raised interest rates to 20% but other measures (e.g. limits on deposit withdrawals) are possible later today. All of this will accelerate Russia’s economic downturn – a fall in GDP of ~5% now looks likely. Subsidiaries of some Russian banks overseas are likely to come under intense pressure (and may fail), but we judge that these are probably too small to create systemic risks.

The west’s sanctions on Russia also include curbs on the country’s currency reserves.

Analysts at Rabobank said the sanctions on currency reserves removed what little support the rouble had.

Even the gold is not liquid if nobody can use FX in exchange for it. There will be a complete collapse in the rouble today.

Ozkardeskaya has also looked at the west’s decision to block some Russian banks from the international payment system Swift.

SWIFT is the messaging system of international transactions and being left outside SWIFT complicates the oversees transactions terribly. It doesn’t block them, but it makes them chaotic and unreliable. It’s like going to a restaurant and not being able to order the food you want.

The sanctions increase the risk of insolvency of big Russian banks and the risk of a bank run in Russia.

More importantly, the Russian central bank is also concerned with Western sanctions which will greatly weaken its ability to manage the war, the crisis, and the financial stability.

Russian markets will again be under a huge selling pressure, and dollarization will be the next chapter in Russia. The Ruble has already been smashed by near 30% this morning to a record low, and there are hints that this could extend to 175-200 range. This means that this needless and compulsive Ukrainian war will become hard for Russia to finance.

According to the latest news, Russians are surprised and frustrated by how strong the Ukrainians resist to protect their home. The two countries will talk today at the Belarus border, but the expectations are pessimistic.

Ipek Ozkardeskaya, senior analyst at the bank Swissquote, has looked at the latest jump in oil prices.

The week kicks off with soaring energy prices and a decent selling pressure on European and American index futures as the Russian invasion in Ukraine and the bigger sanctions imposed on Russia take a severe toll on market sentiment.

The barrel of US crude jumped more than 5% to $100 this morning, whereas the European natural gas futures closed last Friday 50% higher.

Could OPEC help? Yes, but it will probably choose not to. About two years ago, OPEC countries had refused to restrict production as a response to the pandemic, sending the price of a barrel all the way down to minus $40. There is no guarantee that they don’t do the opposite move this week and announce they won’t raise production in the face of the Ukrainian crisis and send the energy prices soaring. Therefore, the risks to the energy markets remain tilted to the upside.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The Russian rouble has crashed more than 40% to a new record low against the dollar, oil prices have jumped as much as $7 a barrel and gold prices have gained 1%, as financial markets opened for trading for the first time since western nations announced wider economic sanctions on Russia for its invasion of Ukraine.

The sanctions include blocking some Russian banks from the Swift international payments system, leading to expectations among investors of a run on the Russian currency as people scramble to swap their roubles for dollars and other denominations.

The Russian central bank was quick to respond and hiked its key interest rate to 20% from 9.5% this morning to stem the slide in the rouble, which will lead to higher inflation. Russia has also ordered companies to sell 80% of their foreign currency revenues, the central bank and the finance ministry said.

This comes after a number of measures announced by the Bank of Russia on Sunday to counter the economic impact of western sanctions. It said it would resume buying gold on the domestic market, launch a repurchase auction with no limits and ease restrictions on banks’ open foreign currency positions. It also increased the range of securities that can be used as collateral to get loans and banned brokers from selling Russian securities to foreigners.

The rouble dropped as low as 119 per dollar in Asian trading, and later traded 28.8% lower at 118, compared with its closing price of 83.64 on Friday.

Russian markets will open at 10am local time, three hours later than usual. European stock markets are set to fall at the opening bell after chunky gains on Friday.

Brent crude has moved back above $100 a barrel, after falling below that threshold on Friday (it touched close to $106 a barrel on Thursday when Russia began its invasion of Ukraine). This morning the global benchmark is trading at seven-year highs again, up $5 at $103.01 a barrel, a 5.2% rise, while US light crude is $5.46 ahead at $97.08 a barrrel, a 6% gain.

Gold has benefited as a safe-haven investment, with spot gold rising by 1% to $1,905 an ounce.

In a sign that the war in Ukraine isn’t going as planned for Russia, Vladimir Putin on Sunday ordered his military to put Russia’s nuclear deterrence forces on high alert, a rather scary development. The US responded that this was a “totally unacceptable” escalation.

But there was also hope for talks: the Ukrainian president, Volodymyr Zelenskiy, announced that a delegation would meet Russian officials without preconditions on his country’s border with Belarus, but it was far from clear Putin was ready to entertain talks that did not involve compliance with his demands that Ukraine accept partition and disarm.

Things have moved on fast since last Monday when Putin announced he was formally recognising separatist regions in eastern Ukraine and ordered troops into the region. This was followed by Russia’s full-scale invasion of Ukraine in the early hours of Thursday, and a Russian assault on the capital, Kyiv, on Friday and Saturday.

The fierce fighting, also in Ukraine’s second-biggest city, Kharkiv, prompted the US, Britain, the EU and Canada to block Russia’s access to the Swift international banking payment system on Saturday, after mounting pressure for greater sanctions.

Berenberg analyst Holger Schmieding said:

The exclusion of major Russian banks accounting for 70% of the Russian banking market from the SWIFT system to make payments and the possibly even more far-reaching attempt to limit the use of Russia’s foreign exchange reserves of some $630bn can cause problems for financial and non-financial companies outside Russia. The precise impact is difficult to predict in advance. But we would expect central banks, regulators and finance ministers to see to it that the measures will not cause a major financial accident in the advanced world beyond temporary frictions.

The British oil giant BP bowed to pressure to exit its stake in the Russian state-owned oil company Rosneft last night. The firm announced that it was offloading its 19.75% voting stake in Rosneft, saying Russia’s invasion of Ukraine represented a “fundamental change” in relations with Moscow. The value of the stake was estimated at $14bn (£10.4bn) at the end of last year. It is unclear who BP would sell it to.

The oil firm said its chief executive, Bernard Looney, was resigning from the Rosneft board with “immediate effect”. Former BP chief executive Bob Dudley also stood down from the Rosneft board, which is chaired by the former German chancellor, Gerhard Schröder, and run by Igor Sechin, a close ally of president Vladimir Putin.

Russian airlines are facing an almost complete blockade from flying west over Europe after they were barred from the airspace of nearly 30 countries. On Sunday evening the European Commission president, Ursula von der Leyen, said the whole bloc would close its airspace to Russian aircraft.

And Britain has compiled a “hit list” of Russian oligarchs who will face sanctions over the coming weeks, according to the foreign secretary, Liz Truss. She said there were more than 100 billionaires in Russia and that some of them would face “a rolling programme of sanctions” as officials compiled the evidence to justify their assets being frozen in the UK.

The Agenda

• 1.30pm GMT: US trade for January
• 3.50pm GMT: Speech by European Central Bank president Christine Lagarde