The ruble exchange rate is falling after Western countries announced sanctions against Russia, including freezing central bank assets and isolating banks from the SWIFT system. In response, the Bank of Russia banned domestic brokers from selling securities on behalf of foreign clients, stopped trading on the exchange, and then significantly raised interest rates.
On Monday at 6:30 Polish time (8:30 Moscow time), the US dollar / Russian ruble exchange rate rose by more than 28%. Such a massive depreciation of the ruble was not observed for a single day even in the 1990s, when Russia declared bankruptcy. One dollar traded on the interbank market for nearly 108 rubles — more than 23 rubles on Friday, Bloomberg reported. Analysts noted that liquidity was very low. Trading took place exclusively on the foreign market as the Bank of Russia postponed the opening of the domestic market to 10:00 local time.
Bloomberg reported that after this hour, the exchange rate of the US dollar against the Russian ruble rose by 22 percent, and 102 rubles were paid to the dollar. By 8:30, it was already more than 110 rubles. Then the Russian currency rose slightly again and at 11:00 the US dollar / Russian ruble fell below 102 again, according to Bloomberg quotes. After 13:30 the price broke 104.
The collapse of the ruble is brutal. Useful historical context in this FT chart. pic.twitter.com/Frn7CAlmCc
– Robert Ward (@RobertAlanWard) February 28, 2022
As Bank Pekao analysts mention, other sources may point to a slightly different path. “The currency market is not like the stock market. It is more dispersed and there is more than one source of quotations. Even in a normal situation, they may differ from each other by a few or twelve points. In a crisis situation, they may differ from each other. It can cut A long way ”- they wrote on Twitter.
The panicked reaction came as a result of the sanctions announced by the EU authorities at the weekend in agreement with partners from the United States and Great Britain. Ursula von der Leyen announced the freezing of the assets of the Central Bank of Russia and a ban on all transactions with the bank, as well as the exclusion of important Russian commercial banks from the SWIFT system. However, German Chancellor Olaf Scholz has already stated that sanctions will apply to all Russian banks. The West’s actions in finance should be supported even by the traditionally neutral Swiss. President Cassis said on Sunday that a freeze of Russian assets was “highly likely.”
Meanwhile, they have already announced the sale of Russian assets Norway’s largest pension fund in the world or BP, with roughly 20 per cent. Shares in Rosneft. On Friday, Standard & Poor’s downgraded Russia’s foreign-currency-denominated debt to an undesirable level. Moody’s put the ratings of Ukraine and Russia on a watch list with the possibility of downgrading. Fitch in turn lowered Ukraine’s long-term rating to “CCC” from “B”.
But the actions of the Russians themselves are also a strong cause for concern for the Russian authorities. Over the weekend, social media was filled with images of giant queues to ATM machines. Anticipating a sharp weakening of the ruble, people were withdrawing money en masse – to exchange it for foreign currency, or to exchange it for goods (luxuries, jewelry, electronics), which would probably increase prices from Monday, or for fear of ruble restrictions. Withdrawals from accounts by the authorities or limit the operation of cards. It is difficult to say whether this is a real scramble for banks of a scale that could disturb the stability of the domestic financial system, but such speculation is certainly justified. Of course, depositors also tried to withdraw the accumulated currencies in banks. “Currency from accounts is paid mainly only on demand (you have to wait at least a day)” – noted analysts from the Center for Oriental Studies over the weekend.
While a dollar on the interbank market costs just over 100 rubles, ordinary Russians will have to pay more for those “green” – if they are able to buy them at all. According to media reports, it exceeded 160 rubles, twice what it was on Friday. However, in the Revolut application, we can note the gap between the sale and purchase price of the ruble. For 1 dollar you can buy 90 rubles, but to buy 1 dollar you have to spend 125 rubles.
A sharp devaluation of the currency will add to the already high inflation. In January it was 8.7 percent. against a target of 4 per cent. – Refers to the local central bank. The former deputy head of the Bank of Russia Sergei Alekchenko stated that the decline by 30-40 percent. It will add another 5 percentage points to the pace of price growth. And this is just the effect of changing the exchange rate, not to mention the potentially disastrous consequences of being cut off from some foreign goods or services.
The Bank of Russia is making desperate attempts to stem the collapse of Russian asset prices. Its authorities postponed the opening of the forex and money markets and domestic buybacks to 10:00 AM Moscow time (8:00 AM in Poland), and also stopped trading on the Russian Stock Exchange until at least tomorrow. also, Preventing local brokers from selling assets owned by their foreign clients. They also announced the resumption of gold purchases in the local market, massive liquidity injections to local financial institutions, and easing of regulations on currency positions at banks. Monday before the market opens The Bank of Russia raised interest rates significantly – from 9.5 percent. Up to 20 percent in the case of the reference rate. At 4 p.m. Moscow time, President Elvira Nabiullina will speak.
In the face of limited access to some reserve assets, an increase in the cost of money may be the main way to defend the national currency. Russia’s second largest commercial bank – VTB – decided to raise interest rates on mortgage loans by 4 percentage points to 15.3 percent from Monday, even before the central bank’s decision. Reuters reports.
Meanwhile, the Russian Finance Ministry has ordered business entities with foreign countries to sell 80 percent. Revenue in foreign currency.
While trading on the Moscow Stock Exchange remains suspended until at least March 1, the securities are traded on the London Stock Exchange. Gazprom shares listed there were overvalued by more than 50 percent, and Sberbank – by more than 60 percent. Since February 16, the valuation of the gas giant on the London Stock Exchange has fallen by more than two-thirds, and the largest Russian bank – by nearly 90 percent.
Exclusion from the SWIFT system and freezing of assets of the Bank of Russia
Western sanctions have caused panic selling off Russian assets, but their real and direct impact on the Russian economy and financial system may not be as strong as some have claimed.
SWIFT deals only with the transfer of information between financial institutions, not with the transfer of funds between banks. “Excluding a bank from the SWIFT system does not automatically mean that it cannot make payments. Funds transfer is still possible, but requires the use of other communication tools with partners” – Dr. Michai Kessel, analyst at Bankier.pl . points out.
Therefore, Russian banks can exchange transaction data with counterparties via telex, telephone or e-mail. Of course, this would be time consuming and possibly more dangerous, which could throttle payments, for example. “In practical terms, this is a very serious blow, which makes dealing with foreign operations cumbersome,” Kessel notes.
For several years, Russia has been preparing its financial system to switch to an alternative to SWIFT – the national SFPS system, and may also use the Chinese CIPS system more often. “Attempts to circumvent sanctions may take other forms as well – such as the use of intermediaries in non-restricted countries, changes in ownership of financial institutions (and transfer to another jurisdiction).” The full analysis is available in the article entitled “Swift is closing its doors on Russian banks. How will the Kremlin try to deal with isolation?“.
Moreover, it is still not clear whether all Russian enterprises will be excluded from the system and what transactions can take place without significant obstacles. The Americans mentioned that such an exception would be payments for energy, that is, oil and gas. Today, a similar message was issued by the German authorities, and the Ukrainian side reported that the Russians had sharply increased the volumes of gas sent to consumers in the European Union. On the one hand, Moscow can count on foreign exchange infusions, on the other – uncertainty increases tension in financial markets.
It may be more painful for the Russians to freeze some of their central bank assets. Official data show that at the end of January, the value of Bank of Russia reserves exceeded $630 billion. Three-quarters of them are assets denominated in foreign currencies, and less than 5 per cent. Position in the International Monetary Fund and Special Drawing Rights (IMF unit of account). To this is added 2,300 tons of gold, then its value is more than 130 billion dollars.
We do not know how much resources have been “used” in recent days to protect the ruble, nor do we know the current structure of the reserves. In the middle of last year, the value of securities amounted to more than 300 billion dollars, and deposits more than 150 billion dollars. Euro-denominated assets accounted for nearly a third, more than 20% – gold over 16% – dollar assets, more than 13 per cent. The yuan and 6.5 percent. – Denominated in pounds sterling. By 10 percent against other currencies. However, the structure may have changed since then.
According to EU estimates, about half of the assets of the Bank of Russia will be frozen. Europeans and Americans (Washington announced its decision on February 28 at 13:30) intermediaries will not be able to act on behalf of the Bank of Russia, for example, sell their securities. In addition, Russians are isolated from deposits held in selected foreign central banks, and possibly also in the Bank for International Settlements (in Switzerland) or the International Monetary Fund. The Russians have allocated about $100 billion to this group of institutions.
This means that the Bank of Russia will have limited funds to purchase ruble-denominated assets in the market to support the value of the Russian currency. Of course, such actions can be carried out by other “Moscow-friendly” entities that have their own resources – such as Russian financial institutions that are not subject to sanctions, or perhaps their foreign counterparts. And then, they will have to take into account the fact that they will be targeted by the Americans. Meanwhile, the pool of potential interested parties is rapidly shrinking, as the US Treasury announced on Monday that it was blocking dealings not only with the Bank of Russia, but also with the Russian Wealth Fund and the Ministry of Finance. “This measure effectively freezes all assets of the Russian Central Bank held in the United States or with Americans, wherever they are,” the statement said.
We plan to continue the topic
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