Russia is on the brink of financial collapse as sanctions hammer its economy

Russia was scrambling to avoid a financial meltdown on Monday as its economy was hit by a series of crippling Western sanctions imposed over the weekend in response to the invasion of Ukraine.

President Vladimir Putin was due to hold crisis talks with his top advisers after the ruble fell to a record low against the US dollar, the Russian central bank raised interest rates to 20% and the Moscow stock exchange was closed for the day.

The European branch of Russia’s biggest bank was on the verge of bankruptcy as depositors rushed to withdraw their funds. Economists predict that the Russian economy will contract by 5%.
The ruble lost about 20% of its value to trade at 100 against the dollar at 6 a.m. ET, after falling 40% earlier. According to a statement from the country’s central bank, the start of trading on the Russian stock exchange was delayed and then canceled entirely.

The United States, the European Union, the United Kingdom and Canada announced on Saturday that they would expel some Russian banks from SWIFT, a global financial messaging service, and “cripple” Russian central bank assets.
“The escalation of Western sanctions over the weekend pushed Russian banks to the brink of collapse,” 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 tough sanctions by amassing $630 billion in international reserves, including currency and gold, but at least some of that financial firepower is now frozen and its “fortress” economy is under unprecedented attack.

“We will … prohibit 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 in a statement on Sunday.

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 around 40% of Russian reserves are now banned from Moscow.

“The external conditions of the Russian economy have changed dramatically,” the Russian central bank said. “This is necessary to support financial and price stability and protect citizens’ savings from depreciation,” the bank added.

The central bank said it would provide an update on stock trading Tuesday at 9 a.m. local time (1 a.m. ET).

“Due to the current situation, the Bank of Russia has decided not to open a stock market section, derivatives market section or derivatives market section on the Moscow Stock Exchange today,” the statement said.

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 main 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 more difficult for it to sell for export.

Putin was due to meet with his prime minister, the finance minister, the head of Russia’s central bank and the head of Russia’s main lender Sberbank to discuss “economic issues”, Kremlin spokesman Dmitry Peskov told reporters.

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

A race on the banks

Analysts have warned that the turmoil could trigger a run on Russian banks as savers try to secure deposits and hoard cash.
“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 being that we could see a huge inflationary shock play out in Russia,” he said. Michael Hewson, chief market analyst at CMC. Markets UK, wrote in a note.
“A run on Russian banks appears to be underway as ordinary Russians fear their credit cards may no longer work,” he added.

The European branch of Sberbank, Russia’s biggest lender which has been sanctioned by Western allies, was one of the first victims. According to the European Central Bank, Sberbank Europe, including its Austrian and Croatian branches, was failing or was about to fail due to “large deposit outflows” caused by the Ukraine crisis.

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

Shares of Sberbank (SBRCY) fell almost 70% on the London Stock Exchange. Other Russian companies listed abroad have also been hit hard. Gas giant Gazprom (GZPFY) fell 37% in London trading, while internet service provider Yandex (YNDX) was expected to open 20% less in New York.
The Russian central bank intervened in currency markets last week to try to support the ruble. On Friday, it announced it was increasing the supply of tickets at ATMs to meet increased demand for cash. According to the Russian state news agency TASS, several banks have seen an increase in withdrawals, especially of foreign currency, since the invasion of Ukraine.

“These are the conditions under which the local bank runs begin,” wrote Neil Shearing, chief economist at Capital Economics. “The [Russian central bank] raised interest rates this morning to 20% but other measures (eg limits on deposit withdrawals) are possible later in the day. All of this will accelerate Russia’s economic slowdown — a drop in GDP of [about] 5% now seems likely.

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