Finance

FTSE 100 Live 28 February: Sanctions trigger Russia financial markets turmoil, BP dumps Rosneft stake

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Defense shares surge amid spending boost

Germany’s announcement of a significant increase in military spending sent London-listed defense stocks sharply higher today.

With other countries likely to boost their defense budgets, including in areas of cyber intelligence and protection, shares in BAE Systems surged in value.

FTSE 100-listed BAE jumped 13% to a new record of 741p, having risen by 25% in the past week. MoD supplier Qinetiq and defense countermeasures firm Chemring rose 8% while military headgear supplier Avon Protection lifted 6%.

JP Morgan said today that the invasion of Ukraine by Russia has “fundamentally changed the outlook for European defense stocks”. The bank upgraded its recommendation on Germany’s Hensoldt, with shares in the sensors business up by as much as 84% ​​today.

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FTSE 100 down 1%, BP 4% lower

The FTSE 100 index has opened 1% lower, down 77 points to 7412.

BP shares are down more than 4% after it said last night that it would take a financial hit of up to $25 billion (£18.7 billion) as a result of dumping its 19.75% stake in Russia’s Rosneft.

Despite the significant financial cost and loss of Rosneft’s dividends, BP said it remains confident in the “flexibility and resilience” of its financial position.

This includes reaffirming the guidance for shareholder distributions – dividends and buybacks – up to 2025 that was given with February’s full year results.

BP, which has operated in Russia for 30 years, said its chief executive Bernard Looney had also resigned from the Rosneft board.

Russian gold miner Polymetal International and the steel producer Evraz were again under heavy selling pressure after falling 33% and 16% respectively. The potential boost to defense spending sent shares in BAE Systems up by more than 12%.

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Pressure on Russia’s financial system

The rouble opened 30% lower against the US dollar in offshore trading, but the fall has been much deeper on local retail currency exchanges.

London-based consultancy Capital Economics said today: “These are the conditions in which runs on local banks begin.

“The Central Bank of Russia has this morning raised interest rates to 20% but other measures (eg limits on deposit withdrawals) are possible later today.

“All of this will accelerate Russia’s economic downturn – a fall in GDP of about 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.”

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Rouble slides, interest rates up to 20%

The rouble has fallen by more than 30% to its lowest level on record after significant new sanctions from the West triggered turmoil in Russian financial markets.

Most Russian banks are now excluded from the Swift global payment system and central bank reserves have been effectively frozen.

At its last estimate in June, Deutsche Bank said Russia had around $630 billion of foreign reserves of which a large portion still likely resides directly with G10 banks/central banks.

Deutsche Bank commentator Jim Reid said: “This is in effect a financial war now. The first-round impact of this news is likely to be turmoil in Russian markets today and a funding crisis.”

Russia’s central bank today responded to the slump in the value of rouble by raising interest rates from 9.5% to 20%, while also telling companies to sell their foreign currency revenues.

Fears that Russia retaliation may lead to a disruption of energy supplies led to a spike in the Brent crude price to as high as $105 a barrel before settling at around $103.

CMC Markets forecasts that the FTSE 100 index will open 110 points lower at 7379, having rallied prior to the weekend.

US futures markets are pointing to a fall of 2.5% for the S&P 500 and more than 3% for the tech-led Nasdaq index as US markets put back Friday’s gains.

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