Desperate Russians rush to cash out as sanctions send currency plummeting
Russian President Vladimir Putin had every right to think that the threat of sanctions if he invaded Ukraine would fall flat. After all, when its troops stormed in to annex Crimea in 2014, the European Union restricted some of Russia’s financial transactions, which ended up costing Europe as much as the Russian economy and, over time, has actually deepened the continent’s dependence on Russian gas and other exports.
Putin no doubt believed that Russia’s tentacles in the European economy were too deep to break.
But that all changes quickly after the European Union begins to pressure the usual holdouts, including Germany, which wanted to exempt gas from the sanctions list; Italy, which wanted to exempt luxury goods; and Hungary, which strongly disagreed with the sanctions. With the EU now fully aligned on the most painful sanction of all – Russia’s withdrawal from the SWIFT international monetary network – Putin is feeling the pain.
On Monday, the first day of trading since new sanctions took effect, Russia’s economy was in free fall, made worse by the US Treasury’s announcement on Monday morning that it would cut the Central Bank of Russia, announcing on its website Internet: “This action effectively immobilizes all assets of the Central Bank of the Russian Federation held in the United States or by American nationals, wherever located.
The Russian ruble fell 30% against the US dollar to an all-time low and Moscow raised interest rates to an emergency level of 20%.
Russia’s central bank chose not to open trading on the Moscow stock exchange on Monday morning in an attempt to block the selloff. “Due to the current situation, we have decided not to open a stock market section, a derivatives market section or a special derivatives market section on the Moscow Stock Exchange today,” the Moscow Exchange said. Bank. according to the media.
As Russians lined up at ATMs across the country fearing a shortage of cash, the Central Bank of Russia called for calm. This fell on deaf ears, despite promises from the Kremlin that it has “the resources and tools to maintain financial stability and ensure the operational continuity of the financial sector.”
A run on Russian banks may already be underway. “The events of this weekend now mean that no G7 bank will be able to buy Russian roubles, sending the currency into a tailspin, with the end result that we could see a huge inflationary shock unfold in Russia,” he said. Michael Hewson of CMC Markets UK. told CNN. “A run on Russian banks inside the country already appears to be beginning, as ordinary Russians fear their credit cards may no longer work.”
Since Russia’s war is only five days old, things will only get worse. “It looks like Russia is increasingly becoming an economic pariah, increasingly isolated from the global financial system,” Will Walker-Arnott, chief investment officer at Charles Stanley, told the BBC.
The collateral damage extends far beyond the oligarchs, whose European properties are now sequestered. Entities as far apart as the Russian models on OnlyFans and Russia’s World Cup soccer team are feeling the pinch. The same goes for Russian airlines, which are now banned from flying over much of European airspace. Flights to Russia from Europe have been canceled over fears that sanctions banning the sale of aircraft parts to Russia could mean Putin could confiscate a few jets for spares. KLM even turned around with two passenger planes mid-flight for fear they wouldn’t return.
The economic collapse will have a devastating effect on ordinary Russian citizens who have little hope of being able to force Putin out of office.
And it will only get worse. Norway announced it would withdraw Russian investments from its lucrative $1.3 trillion sovereign wealth fund and Moody’s said it would likely downgrade Russian bonds to “junk” following a similar move by S&P. European Commission President Ursula von der Leyen said in a statement on Sunday that the worst may be yet to come. “We will also ban transactions from Russia’s central bank and freeze all of its assets, to prevent it from funding Putin’s war,” she said.