The fall of the ruble has further deepened Russia’s isolation

On Monday, as the financial markets in Asia started trading, the value of the Russian ruble plummeted. The reason was the strict Western sanctions introduced over the weekend. In effect, they froze Russia’s foreign exchange reserves and began locking Russian banks outside the SWIFT network to facilitate international transactions. The U.S. dollar rose 40% against the ruble, with the Russian currency reaching 118 to the dollar from its Friday close of 84, a new record.

The move would be one of the biggest one-day falls in the modern history of the Russian currency, similar to the one-day fall recorded in the worst moments of the country’s financial crisis in 1998, when Russia defaulted on its debt. In mid-Moscow, Russia’s central bank raised its key interest rate from 9.5% to 20% in an effort to stem the ruble’s recession, and the country’s finance ministry instructed companies with foreign-currency earnings to convert 80% of their earnings. In rubles

The fall of the ruble shows how isolated the government has become. Its effective exclusion from the international financial market could cause serious damage to the economy. The importation of everything from a submerged currency car to medical products makes it dramatically more expensive. External debt, most of which is denominated in dollars, will make it more difficult to provide services. The fall of the ruble will further reduce the standard of living of the Russian middle class and will hurt any company that has to pay for foreign goods and services.

The country’s central bank has instructed financial institutions to reject instructions to try to sell Russian securities to foreign clients, a move that could trigger controls to prevent massive outflows of capital. Any restrictions on foreign investors withdrawing their money could tarnish the country’s image as an investment destination. Over the weekend, Russian citizens lined up outside banks to withdraw their money. Panic over the stability of Russia’s financial system could still lead to a bank run.

Probably a factor as to why they’re doing so poorly. In Monday-morning trade in Asia, they were down just% 100 per barrel, up nearly 5% from their level at the end of last week. As a major exporter of oil and gas, Russia will generally benefit from higher energy prices. But the ruble’s sinking suggests that additional revenue from the sale of goods is expected to fade compared to the losses caused by the sanctions.

The benchmark equity indices in Hong Kong, Shanghai and Tokyo were not too far from their levels at the end of Friday, with other markets spilling over early Monday. American and European market indices were low, but not very high. But as investors around the world are scrambling to work through the knock-on effects of the conflict for assets, more frantic trading activity could ensue.

The threat of tougher sanctions has become more real since the financial markets closed on the weekend of February 26th. The United States, Britain and the European Union will target Russia’s central bank and its ability to sell $ 630 billion in foreign exchange reserves, most of which are held in foreign custody, could undermine Russia’s ability to protect its currency. . On Monday morning, the EU banned all transactions with Russia’s central bank.

Russian banks’ bid-and-ask quotes for the US dollar — the price at which a dealer will buy or sell হয়েছে have expanded dramatically over the weekend, showing uncertainty about what lies ahead and whether dollar holders will have to hang on to hard currency. . Sberbank, Russia’s largest bank, cited a nearly 22% spread between dollar buying and selling even before Monday’s exchange rate hike. One week ago, the spread was only 5%.

The Russian government has in recent years sought to shield itself from the full effects of further international sanctions. In 2014 the central bank established an alternative financial messaging system for SWIFT, called SPFS. Last year it boasted that the system’s message volume exceeded 20% of SWIFT levels by 2020, with nearly 400 organizations connected to the system, including several foreign companies.

But the recent international sanctions mean that foreign banks will be reluctant to participate in any solution that could violate incoming sanctions. In 2020, when the US Treasury Department imposed sanctions on Hong Kong’s political and security figures, even Chinese banks in the region would not have accounts for those targeted. The reason is that they were afraid of losing access to dollar-arranged payments and settlement.

Direct exposure between the Russian financial system and the rest of the world is thin, but not non-existent. According to the Bank for International Settlements, banks located in Russia record $ 134 billion in liabilities to foreign institutions, which is about 0.4% of the total worldwide. Four-fifths of the country’s 15.5trn-ruble government bond market is held internally. This means that the risk of direct financial transition from the Russian financial crisis is low.

According to the S&P Global Rating, a credit-rating agency, several European banks – OTP of Hungary, Rifeisen of Austria, Societe Generale of France and Unicredit of Italy – have significant exposure to Russia or Ukraine. But with no clear current equivalent of long-term capital management, the American hedge fund that collapsed in 1998 as a result of high leverage bets on Russian government bonds threatened to take over most of Wall Street.

Instead, the most significant impact of Russia’s financial crisis could flow through real economic channels. Rising oil prices will push up inflation, which has already soared in most of the Western world. And Chicago wheat futures for delivery in May rose nearly 7% during overnight trading, a little over $ 9 per bushel. As a staple food in most parts of the world, further disruption of supply means higher food prices. According to Rabobank, a Dutch bank, Russia and Ukraine together account for 30% of global wheat exports.

The Federal Reserve’s response to market turmoil adds another element of uncertainty. Until the conflict erupted, expectations were growing that the Fed could signal an intention to whip up inflation with a 0.5 percentage point interest rate hike. Based on market prices, investors still expect the US Federal Reserve to raise rates at its mid-March meeting, but a more modest 0.25 percentage point.

If the ruble weakens and efforts to prevent capital from leaving the country continue, the financial loss of Russian business and livelihoods could be long lasting. The diversification of the Russian economy away from commodities will be set back by years. Just as Russian President Vladimir Putin has made himself a parasite by invading neighboring countries, so too could Russia’s economy be shattered.

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