The Russian ruble collapsed in overnight trading to a record low against the dollar after Western leaders unleashed the financial equivalent of a bazooka by freezing the country’s massive war chest of foreign reserves aimed at crippling the economy.
Russia’s central bank moved swiftly to try and halt the ruble’s fall by more than doubling interest rates from 9.5% to 20% while ordering Russian individuals and companies to sell 80 per cent of their revenue in foreign currencies – thus forcing them to buy the currency to help prop it up and prevent a run on the country’s banks.
Elvira Nabiullina, head of the Central Bank of the Federation, is due to make another statement at 1pm GMT today – Moscow is three hours ahead of the UK – in an attempt to calm the markets and to stop the Russian population from withdrawing funds.
This follow’s the bank’s announcement on Sunday which stated: “The Russian banking system is stable, has sufficient capital and liquidity to function smoothly in any situation. All customer funds on the accounts are saved and available at any time.”
It also said that it will use its own network, called the System for Transfer of Financial Messages (STFS) , for payments within Russia.
Yet the central bank may be too late to halt a run on the banks – long queues at ATMs across Russia were reported over the weekend and today. On Friday, the central bank increased the amount of money supplied to ATMs across the country to the highest level since March 2020.
In another move to slow down the impact of the latest round of punitive sanctions, the Moscow stock exchange will stay closed until 3pm in an attempt to head off an all-out crash.
The decision by Western leaders on Saturday to freeze the foreign currency reserves held by the central bank is one of the most punitive acts of financial revenge yet taken by the West against a hostile country.
Freezing foreign currency reserves has only ever been undertaken before against North Korea, Venezuela and Iran but the nature of these sanctions against Russia take financial reprisals to another level.
Russia currently holds about $640 billion of foreign currency in reserves and recent figures show that about 32% of the reserves are held in euros, 22% in gold, 16% in dollars, and 13% in Yuan. According to Rob Person, Soviet expert and professor of international relations at the US Military Academy at West Point, most of the gold is held domestically, meaning it’s beyond the reach of sanctions.
Until now, much has been made by financial analysts about how resilient Russia would be in the event of conflict, that President Putin has been preparing “Fortress Russia” for years by building up a vast store of reserves to protect Russia against any retaliatory sanctions.
But this does not seem to be the full picture. It’s estimated that about $300 billion of the country’s reserves are located abroad, with dollar reserves held at the US Federal Reserve and euros either in Brussels or Frankfurt.
If those assets are frozen by Western central banks through this latest raft of sanctions, that stops the Russian central bank from using reserves to either intervene to prop up the ruble or transfer money back home to the Russian Treasury.
That’s why the latest sanctions, announced late on Saturday by the US, the UK, Canada and the European Union, are so devastating. By sanctioning the central bank, and excluding some Russian banks from the SWIFT financial payments messaging system – which communicates the details of trillions of dollars’ worth of daily payments between banks – the West has declared war on Russia’s connectivity to the global financial system and, crucially, its currency.
“Sanctioning Russia’s central bank is likely to have a dramatic effect on the Russian economy and its banking system, similar to what we saw in 1991,” said Elina Ribakova, deputy chief economist for the Institute of International Finance. “Remember what that looked like”·
She adds: “This would likely lead to massive bank runs and dollarisation, with a sharp sell-off, drain on reserves – and, possibly, a full-on collapse of Russia’s financial system.”
And that seems to be the aim of the West’s latest bazooka which, according to Person, is the “nuclear option”.
Using the toughest language yet to emerge from the EU, Ursula von der Leyen, President of the European Commission, said: “The European Union and its partners are working to cripple Putin’s ability to finance his war machine.”
Or, as one US administration official put it, the new measures were a direct assault on Russia, meaning it would be “kicked off the international financial system” and become a “global economic and financial pariah.”
Markets guru, Mohamed El-Erian, part-time chief economic adviser at Allianz and chair of Gramercy Fund Management, was another to point out how powerful the new measures are, saying that excluding Russia from SWIFT “has the potential to cripple the economy there” if done comprehensively.
A US lawyer and former banking regulator, Ross Delston, has been quoted as saying: “It’s the closest thing to a declaration of war from a financial perspective. It’s going to result in Russia being viewed as radioactive by US and EU banks, which in turn would be a major barrier to trade with Russia.”
What can Russia do now to prevent a run on the banks? One view is that the central bank may call a stop to trading, and fix the exchange rate. That’s the view of former Russian Central Bank Deputy Chairman Sergei Aleksashenko, who was reported as saying: “There is going to be a catastrophe on the ruble currency market on Monday. I think they will stop trading and then the exchange rate will be fixed at an artificial level just like in Soviet times.”
In other punitive measures, the EU will follow the UK in ending the sale of golden visas – a fast-track route to citizenship offered in exchange for cash.
Cyprus, Malta, Portugal and the UK in particular have sold residency to tens of thousands of Russians with only minimal checks on the legitimacy of their wealth.
Taken together, these new sanctions against Russia have sent markets around the world on another roller-coaster ride. European stock markets are all down this morning, with the Stoxx 600 share index falling 1.6 per cent, Germany’s Xetra Dax down 1.8 per cent and the UK’s FTSE 100 1.5 per cent lower.
The war between Russia and Ukraine has already pushed oil prices to their highest levels since 2014 and gas prices to new highs.
What Russia does with regard to its European gas supplies is as yet unknown but highly relevant as it earns about 40% of its revenues from selling oil, gas and other hydrocarbon related products.
Around 40 per cent of Europe’s natural gas comes from Russia, most of it via gas pipelines such as the Yamal-Europe, which crosses Belarus and Poland to Germany, and Nord Stream 1, which goes directly to Germany, and via Ukraine, where it goes to Austria and Italy.
One possibility is that Russia suspends sales of gas to Europe in retaliation for sanctions but that would hurt it’s own economy even more. As one energy analyst says: “We are in a state of mutually assured destruction unless European countries move quickly to shore up their energy from other supplies.”