The sanctions based assault on Russia by the US and its expanding sanctions regime is starting to take its toll as the Russian government and financial authorities scramble to manage the damage that is now affecting everything from corporate profits to foreign currency reserves.

Earlier this month Russian Prime Minister Dmitry Medvedev likened the mushrooming sanctions regime to a “declaration of economic war” and the government has gone onto a war footing to prepare in case harsher measures come in the autumn.

The Central Bank of Russia (CBR) said it will stop its regular foreign currency purchases on domestic market from August 23 until the end of September 2018 in order to "increase the predictability of monetary authorities and lower the financial market volatility."

CBR announced the measure as Russian assets come under mounting sanction pressure and investors are getting increasingly nervous. On August 23 Russian ruble declined to RUB69-RUB70 to US dollar on the news that the regulator might continue to purchase foreign currency despite ruble's continuous weakening.

In recent months the CBR has been buying record amounts of currency as part of a drive to build up reserves level back to $500bn.

But with sanctions pressure building since the April 6 round of sanctions the Ministry of Finance was already planning to scale back its actions on the currency market this month. It said in July it will reduce purchases of foreign currency spending circa RUB348bn ($5.1bn) on the purchase of foreign currency in the domestic market in July-early August, the ministry said.

In July, the Finance Ministry expected to receive RUB387bn of oil revenues, while as of June the actual oil and gas revenues turned out to be lower than those forecasted by RUB39.6bn.

As a result in the period from June 6 to August 6, the Ministry of Finance sent RUB347.7bn for the purchase of currency, or about RUB15.8bn daily for these purposes.

Prior to this, from June 7 to July 5, the Ministry of Finance planned to buy record amounts of currency at RUB380bn – RUB19bn a day -- the highest in the history of interventions. In July, purchases will decrease in general by 8%, and daily interventions by 17%. Now they are going to stop altogether.

The Ministry of Finance started buying currency on the domestic market as part of the budget rule in February 2017 to stabilize the ruble exchange rate and reduce the dependence of the Russian economy on hydrocarbons.

In the meantime the government is also taking the recent sanction shakedown into consideration and said it will present revised economic targets next week.

Sanction pressure peaked at the end of August, with the US stepping up some existing sanctions. And The US government has threatened to impose “crushing” sanctions in Russia this autumn with a bi-partisan sanctions bill that was introduced to the US Congress, as well as the UK's top diplomat Jeremy Hunt this week calling on the European Union to toughen its stance in response to the poisoning of a former Russian spy on British soil last year.

A weaker ruble and lower grain harvest forecast might lead to revised inflation target for this year, the Minister of Economic Development Maxim Oreshkin said on August 22. Currently inflation at record post-Soviet low of 2.5% and to finish this year at an all time annual low of 3.1% for 2018 before rising modestly to 4.3% in 2019 – on par with the CBR’s target rate. The producer price index of inflation (PPI) has been driven higher in recent months by rising petrol prices, amongst other things, and is currently at 16.6% for July.

Updated forecasts to be presented by Oreshkin next week will show a smaller expected GDP growth for 2018. Previously his ministry already warned of an imminent slowdown in 2019 due to planned VAT rate hike.

Unnamed government officials told Bloomberg on August 23 that danger of US sanctions and a succession of crises across emerging markets are not only hurting the currency, but also fuel intensified outflows of capital. In June the CBR said capital outflow could rise to $30bn in 2018 from previously expected $19bn.

The CBR was also said to have added more gold to its reserves in July than any other month this year, Bloomberg reported citing the data by the International Monetary Fund. 

Reportedly the CBR bought 26.1 tonnes of gold, bringing its holdings to 2,170 tonnes valued at $77.4bn. Previous reports also showed that the CBR has slashed its holdings of US Treasury bills since spring 2018 to insulate its reserves from possible sanction fallout.

bne IntelliNews already reported that Russian ruble and government bonds are under pressure, with the yield on 10-year OFZ bonds rose to its highest level since December 2016 at last week's closing to 8.7%. The Russian Government Bond Index (RGBI) lost 4% from the beginning of August and 5% year-to-date to 134.16 points. The bonds of Russian state-controlled development bank Vnesheconombank (VEB) also suffered. 

Separate reports on August 23 claimed that London branch of Deutsche Bank has asked the Russian government to update the client account information under Know Your customer (KYC) practise.

This was confirmed by the Finance Ministry to Vedomosti daily, while other sources told the daily that the government officials were baffled by the request and assume that it could relate to Deutsche Bank acting as agent for deals with securities of state-controlled companies.

Reuters said on August 23 that Credit Suisse froze about CHF5bn ($5bn) of Russia-linked accounts to keep clear of US sanctions. About $6.2bn billion, or 14% of total Russian cross-border outflows went to Switzerland in 2017.

“Credit Suisse works with international regulators wherever it does business to ensure compliance with sanctions, including compliance with sanctions involving Russia,” said a spokeswoman for the bank, as cited by Reuters, without identifying the owners of the money.