The war that Russia has waged against Ukraine is destabilizing the international financial markets in general and the Russian financial system in particular. The Western response to Vladimir Putin’s attack has provoked a first Black Monday in Russian markets without even fully applying the announced sanctions. The ruble has plummeted about 30% against the dollar and the euro in the Forex market after the announcement of sanctions by the European Union and the United States. The decision to exclude some Russian banks from the SWIFT international interbank communications system and the freezing of transactions with the Central Bank of Russia (BCR) has hit the financial heart of Moscow.
To try to contain the bleeding, the Russian Central Bank has doubled interest rates to 20% and has imposed limits to prevent capital flight. The body ordered the delay in the opening of the stock markets and suspended the sale of securities on behalf of non-residents “to guarantee the protection of the rights and legitimate interests of investors in the financial markets.” The Russian financial regulator has raised interest rates from 9.5% to 20% “to ensure that higher deposit rates offset depreciation and inflation risks. This will contain the stability of finances and prices, and will protect citizens’ savings from devaluation,” the agency explained in a statement.
However, this increase in interest rates is insufficient, among other things because the highest monetary authority has lost room for manoeuvre. The freezing of its assets in the countries that have decided to take the step (the EU, the United States and Canada) means that Moscow is left without nearly half of its reserves to act against the deflationary pressures of the markets. According to the bank’s own economic report, these amounted to about 640,000 million dollars at the end of 2020. But as the High Representative for EU Foreign Policy, Josep Borrell, explained on Sunday, by blocking access to these assets, he lost the possibility of using at least half of his resources in this battle.
To avoid this, the Russian Central Bank has used more countermeasures. Among others, it has intervened in the markets by selling foreign currency for more than 84,000 million rubles and has allowed Russian entities to use without restrictions the capital endowments that had to be provided when granting consumer loans and unsecured mortgages. According to Interfax, these “cushions” against non-payments currently totaled about 733,000 million rubles (about 6,000 million euros).
ruble crash
After noon, the Russian currency was devalued from 93 to 114 rubles per euro, and from 83 to 100 rubles per dollar. For the dollar, this is a record drop since at least 1993 and for the euro it is the biggest drop since at least 1994. Trading was highly volatile at the start of the session, with traders warning that low liquidity it is what makes it difficult to balance buyers and sellers. The local currency market has collapsed due to the bottleneck caused by the rush of investors to get rid of rubles. The depreciation of the Russian currency began last Thursday in the face of the military offensive launched by Russia in Ukraine. That day the Moscow Stock Exchange plummeted more than 33%.
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“The central bank’s high rate will discourage the desire to carry out a currency attack, as happened in December 2014,” explains Antón Prokudin, a macroeconomist at the investment company Ingosstraj-Investitsi. That year, the sanctions for the war in eastern Ukraine caused “an explosive growth” of 22% in the exchange rate, which jumped from 74 to 91 rubles per euro. “Today happened probably due to the closing of short positions in currency futures. After seven trading days, the exchange fell below 67 rubles back then,” adds the expert.
However, in the long term, the ruble has been deteriorating and its value has fluctuated over the years in the range between 70 and 90, and the worst could be yet to come for the Russian economy. The analyst warns that if exports drop significantly, and Russian budgets depend largely on selling gas and oil to Europe, “the exchange rate may exceed 150 rubles per dollar in 2024”, which would be equivalent to almost 170 per dollar. euro with the current parity.
The international financial markets do not remain oblivious to the hurricane that is being experienced in Eastern Europe. Most European markets have started the session with heavy losses in another black Monday for investors. The Ibex 35, the main indicator of the Spanish stock market, fell 2.13%. The main trading floors have also woken up with losses close to 2%. The German Dax falls 1.88%; the French CAC, 2.12% and the Euro Stoxx 50 lost 2.3%.
Cut off access to SWIFT
The financial horizon for Russia may darken further because the measure most demanded by Ukraine, the cut off of access to SWIFT, is not in force. It has been announced, but the complexity of partially applying it is delaying its implementation. When it is activated, Moscow will have much more problems obtaining foreign currency by closing the access of “a certain number of Russian entities” to the international payment system. This makes it difficult for it to collect on its exports, thus closing another faucet that allows it to obtain resources with which to stop the deflationary spiral that, at the same time, will make imports more expensive, which will impoverish the Russian population.
With all this panorama, the possibility of bank runs in Russia grows and the threat of a corralito being imposed, like the one suffered in Argentina at the beginning of the century, which consists of a restriction on citizens so that they have the money they have saved in bank deposits.
The European Central Bank warned on Monday in the early hours of the European subsidiary of the Russian entity Sbersbank, based in Austria, is in a situation of “possible bankruptcy” and along with it two of its subsidiaries in Croatia and Slovenia. This situation has come about due to “the deterioration of its liquidity position” after a “significant loss of deposits as a result of the impact on its reputation due to geopolitical tensions”, points out the Frankfurt entity. The Sbersbank group is one of the largest Russian banks and 50% of its shares plus one are owned by the State, which gives it the majority of control in its capital.
The announcement of sanctions against Russia has led credit rating agencies to place the quality of Russian debt at the level of junk bonds. Standard & Poor’s lowered the Russian rating on Friday from -BBB to -BB, and this means that Russia will have to pay a higher risk premium for financing abroad. In any case, this is the least of the Kremlin’s worries. Americans have been barred from buying new Russian dollar bonds since the annexation of Crimea in 2014 and Russia’s public debt is just around 18% of its gross domestic product, according to Statista data.
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