Russian currency plummets as its banking system reels from sanctions

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Mark Thompson, Anna Chernova and Vasco Cotovio, CNN



Posted Monday, February 28, 2022 at 5:42 a.m. EST





Last updated Monday, February 28, 2022 at 3:05 PM EST

(CNN) – Russia was scrambling to stave off financial collapse on Monday as its economy was hit by a wave of crushing Western sanctions imposed over the weekend in response to the invasion of Ukraine.

President Vladimir Putin held crisis talks with his top economic advisers after the ruble fell to a record low against the US dollar, Russia’s central bank more than doubled interest rates to 20% and the stock market Moscow was closed for the day. It will remain closed on Tuesday, the central bank said.

The European branch of Russia’s biggest bank was on the verge of collapse as savers rushed to withdraw their deposits. Economists have warned that the Russian economy could contract by 5%.

The ruble lost about 25% of its value to trade at 104 against the dollar at 12:15 p.m. ET after earlier falling 40%. The start of trading on the Russian stock market was delayed and then canceled entirely, according to a statement from the country’s central bank.

The latest barrage of sanctions came on Saturday, when the United States, European Union, United Kingdom and Canada announced they would expel some Russian banks from SWIFT, a global financial messaging service, and “cripple” the assets of the Russian central bank.

“The spike in Western sanctions over the weekend has left Russian banks on the brink of crisis,” Liam Peach, emerging markets economist at Capital Economics, wrote in a note on Monday.

Freezing reserves

Putin’s government has spent the past eight years preparing Russia for harsh sanctions by building up a war chest of $630 billion in international reserves, including currency and gold, but at least some of that financial firepower is now frozen and its “fortress” economy suffered an unprecedented assault.

“We will (…) ban the transactions of the central bank of Russia and freeze all its assets, to prevent it from financing Putin’s war,” European Commission President Ursula von der Leyen said on Sunday. in a press release.

The United States has also banned U.S. dollar transactions with Russia’s central bank in a bid to prevent it from accessing its “rainy day fund”, senior U.S. administration officials said.

“Our strategy, to put it simply, is to ensure that the Russian economy shrinks as long as President Putin decides to go ahead with his invasion of Ukraine,” said a senior official. administration.

Peach of Capital Economics estimates that at least 50% of Russia’s reserves are now off limits to Moscow.

“The external conditions of the Russian economy have changed dramatically,” the Russian central bank said, announcing its dramatic rate hike and a series of other emergency measures. “This is necessary to support financial and price stability and protect citizens’ savings against depreciation,” the bank added.

Russia is a leading exporter of oil and gas, but many other sectors of its economy depend on imports. As the value of the ruble falls, they will become much more expensive to buy, which will drive up inflation.

The crackdown on its major banks and the exclusion of some of them from the SWIFT secure messaging system that connects financial institutions around the world will also make it harder for it to sell exports – including oil and gas despite the fact that Russia’s vital energy trade has not yet been directly targeted by sanctions.

Finnish oil refiner Neste said it had mostly replaced Russian crude oil with other supplies.

“Russia has long been methodically preparing for the possibility of possible sanctions, including the toughest sanctions we currently face,” Kremlin spokesman Dmitry Peskov said. “So there are response plans, and they are implemented as soon as problems arise.”

A race on the banks

But analysts have warned that the turmoil could lead to a run on Russian banks, as savers try to secure deposits and hoard cash.

“The sanctions target Russia’s domestic financial system, causing bank runs and forcing Russia’s central bank to continue raising rates and/or using its foreign exchange reserves,” the Institute of International Finance said in a published report. Monday.

“Furthermore, we believe that the [central bank] will have to institute strict capital controls and possibly declare a public holiday as bank runs gather pace and demand for currency continues to soar,” he added.

One of the first victims was the European branch of Sberbank, Russia’s biggest lender, which was sanctioned by Western allies. The European Central Bank has declared Sberbank Europe, including its Austrian and Croatian branches, bankrupt, or likely to fail, due to “large deposit outflows” triggered by the Ukraine crisis.

“This has led to a deterioration in its liquidity position. And there are no measures available with a realistic chance of restoring this position,” the ECB said in a statement.

Shares of London-listed Sberbank fell nearly 70%. Other Russian companies listed abroad were also hammered. Gas giant Gazprom fell 37% in London trading. Shares of internet service provider Yandex have been suspended from trading on the Nasdaq, alongside seven other New York-listed Russian companies.

The Nasdaq declined to comment. But a person familiar with the matter told CNN the exchange is asking Russian companies whether they should make material disclosures following sanctions announced in recent days by the United States and other countries.

The Russian central bank intervened last week in the currency markets to try to support the ruble. And on Friday, it said it was increasing the supply of bills at ATMs to meet increased demand for cash. On Monday, the Russian government ordered exporters to exchange 80% of their foreign currency earnings for rubles – a move analysts said was aimed at relieving pressure on the Russian currency.

The central bank also temporarily banned Russian brokers from selling securities held by foreigners, although it did not specify which assets. The government also ordered a ban on foreign currency lending and bank transfers by Russian residents outside Russia from March 1, Reuters reported.

— Charles Riley, Laura He and Chris Liakos contributed reporting.

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