Invasion of Ukraine having major impact on Russian economy

Updated: Feb 28, 2022 / 05:05 AM CST

Ukrainian flags wave in Trafalgar Square as people descend to attend a protest, in London, Sunday, Feb. 27, 2022. A Ukrainian official says street fighting has broken out in Ukraine’s second-largest city of Kharkiv. Russian troops also put increasing pressure on strategic ports in the country’s south following a wave of attacks on airfields and fuel facilities elsewhere that appeared to mark a new phase of Russia’s invasion. (AP Photo/Alberto Pezzali)

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FRANKFURT, Germany — Russia’s Central Bank has sharply raised its key rate from 9.5 percent to 20 percent in a desperate attempt to shore up the plummeting ruble and prevent the run of banks amid crippling Western sanctions over the Russian war in Ukraine.

The bank’s action follows the Western decision Sunday to freeze its hard currency reserves in an unprecedented move that could have devastating consequences for the country’s financial stability. It was unclear exactly what share of Russia’s estimated $640 billion hard currency coffers will be paralyzed by the move, but European officials said that at least half of it will be affected.

The Central Bank also ordered a slew of measures to help the banks cope with the crisis by infusing more cash into the system and easing restrictions for banking operations. At the same time, it temporarily barred non-residents from selling the government obligations to help ease the pressure on ruble from panicky foreign investors eager to cash out.

The impact of Russia sanction went well beyond its own borders. An Austria-based subsidiary of Russia’s state-owned Sberbank has been ruled likely to fail after depositors fled due to the impact of Russia’s invasion of Ukraine.

The European Central Bank, or ECB, said early Monday that the bank had 13.6 billion euros in assets at the end of last year, but has experienced “significant deposit outflows” due to “geopolitical tensions.”

The Russian currency, the ruble plunged, to a record low of less than 1 cent in value Monday after Russia was cut off from the global bank payments system in retaliation for Moscow’s invasion of Ukraine. It dropped nearly 26 percent to 105.27 per dollar, down from about 84 per dollar late Friday.

Russians are already waiting in long queues, worried that their bank cards may stop working or that limits will be placed on the amount of cash they can withdraw, according to the BBC. And it said the new ban on the Central Bank of Russia’s ability to use its roughly $630 billion in foreign reserves undermines its ability to defend the ruble. Inflation is likely to go up because of the currency’s weakness.

The ECB says Vienna-headquartered Sberbank Europe AG “is likely to be unable to pay its debts or other liabilities as they fall due.” The bank is a fully owned subsidiary of Russia’s Sberbank, whose majority shareholder is the Russian government.

Europe’s bank resolution board separately says it has imposed a payments ban on money owed by the bank and a limit on how much depositors can withdraw. The board will decide on further steps, which could include restructuring, selling or liquidating the bank.

Sberbank Europe operates 185 branches and has more than 3,933 employees.

The Associated Press contributed to this report.