Russia’s currency collapsed after Western countries on Saturday agreed to impose crippling sanctions on the financial sector of the country in revenge for its invasion of Ukraine.
The roll fell about 30 percent against the dollar on Monday, costing less than $ 1 after the United States, the European Union and the United Kingdom announced actions to block some Russian banks from the international payment system SWIFT and to limit Russia’s use. of its massive foreign exchange reserves. The system is used to move billions of dollars to more than 11,000 banks and other financial institutions around the world.
The roll rebounded after the Russian central bank sharply raised its key interest rate on Monday to support the currency and prevent pressure on banks. But it traded at a record low of 105.27 per dollar, from about 84 per dollar late Friday.
At the beginning of Tuesday, the ruble was at 104.51 per dollar, down 3.2%. The Moscow Stock Exchange was closed again, as it was on Monday.
A weaker ruble could trigger a spike in inflation, potentially angering Russians, whose budgets will be stretched by rising prices. This will also increase tensions in Russia’s financial system.
A sharp devaluation of the ruble would mean a drop in the standard of living for the average Russian, economists and analysts say. The Russians still rely on many imported goods and the prices of these items are likely to skyrocket. Traveling abroad will become more expensive as their rubles buy less currency abroad. And deeper economic shocks will occur in the coming weeks if price shocks and supply chain problems lead to the closure of Russian factories due to lower demand.
“This will spread to their economy very quickly,” said David Feldman, a professor of economics at William & Mary in Virginia. “Everything that is imported will lead to a jump in the local price in the currency. The only way to stop this will be strong subsidies. “
The rapidly depreciating ruble could also hit Russian companies, which have to issue debt to raise capital.
“IN [ruble] has stagnated and most Russian bonds, whether directly sanctioned or not, have seen prices fall to levels that suggest a significant risk of default, ”analysts at TD Securities said in a research note.
Americans are forbidden to make transactions
In another move to isolate Russia’s financial system, the US Treasury Department on Monday banned Americans from doing business with Russia’s central bank, the country’s Treasury Department and its sovereign wealth fund.
“This action effectively immobilizes all assets of the Central Bank of the Russian Federation held in the United States or by Americans, wherever they are,” the Treasury Department said.
US officials have said that Germany, France, the United Kingdom, Italy, Japan, the European Union and others will join in targeting the Russian central bank.
Tatiana Orlova of Oxford Economics called the moves to partially shut down some Russian banks from SWIFT and the freezing of her central bank’s assets a “crushing policy”, noting in a report that the war in Ukraine “causes panic among Russian households and businesses”.
The crisis in Ukraine has caused turmoil in global financial markets. Russia’s main stock market, Moex, remained closed on Monday. This seems to be an attempt to stop nervous investors from throwing out their shares, according to Nicholas Cowley, a strategist at DailyFX.
After increases on Friday Following reports that Russian and Ukrainian leaders will meet this week, US stocks were set to open lower on Monday. Delegates from both sides sat down for theirs on Monday first direct negotiations since Russia began its invasion five days earlier.
Capital Economics estimates in a report that Russia’s gross domestic product is likely to shrink by about 5% as a result of sanctions against the country’s economy.
People who fear sanctions would cripple the economy have been flocking to banks and ATMs for days, with long queues and machines running out of money on social media. Moscow’s public transport department warned city residents over the weekend that they may experience problems using Apple Pay, Google Pay and Samsung Pay to pay for tickets as VTB, one of Russia’s sanctions banks, processes card payments. in the Moscow metro, buses and trams. .
The Russian government will have to intervene to support declining industries, banks and economic sectors, but without access to hard currencies such as the US dollar and the euro, they may need to print more rubles. This is a move that could quickly escalate into hyperinflation.
To stem the ruble’s decline, Russia’s central bank on Monday raised its key interest rate to 20% from 8.5%. This followed the West’s decision Sunday to freeze Russia’s hard currency reserves, an unprecedented move that could have devastating consequences for the country’s financial stability.
“It is uncertain now whether Russia can even get hold of their large stockpile of [foreign exchange] reserves (whatever the denomination) will government bondholders get back? “Peter Bukvar, chief investment officer at Bleakley Advisory Group, said in a report to investors.” dollars, good luck with your refund if you hold a Russian bond denominated in dollars. “
The roll lost much of its value in the early 1990s after the end of the Soviet Union, with inflation and loss of value causing the government to cut three zeros from ruble banknotes in 1997. This was followed by a further decline following the 1998 financial crisis. in which many depositors lost savings and another decline in 2014 due to falling oil prices and sanctions imposed after Russia took over the Ukrainian peninsula of Crimea.
It was unclear exactly what share of Russia’s estimated $ 640 billion hard currency, some of which is stored outside Russia, would be paralyzed by the decision. European officials said at least half of it would be affected. This has dramatically increased the pressure on the ruble, undermining the ability of financial authorities to support it by using reserves to buy rubles.