Analysis: Russian BC says situation is dramatic and tries to avoid suffocation and financial crashes

The price of Sverbank’s share traded on the London Stock Exchange has fallen by more than 73%. It is the biggest Russian bank and the biggest sanctions target in the “West”. Its Austrian subsidiary, Sverbank Europe, “is failing or is set to fail” because of mass withdrawals, according to a statement from the European Central Bank. The Moscow Stock Exchange was closed for most of its business and is not expected to open this Tuesday (1st).

Companies and investors were forced to sell “hard” currency (dollars, euros, etc.) or were prevented from selling assets to leave the country. From this Tuesday, Russians can no longer make remittances or loans abroad, Vladimir Putin also decided, who called these bitter defensive measures “counter-sanctions”. Overall, it is about controlling the flow of capital, as they say in the jargon: measures typical of countries in violent external crisis, almost asphyxia.

“The situation of the Russian economy has changed dramatically” because of “sanctions imposed by foreign states,” BCR President Elvira Nabiullina told reporters. It is “totally abnormal”. In a detailed study of the effects of the sanctions, the Institute of International Finance believes that the retaliations will cause a fall in Russian GDP this year, among other grim forecasts.

As the population and companies rushed to withdraw money in droves since Friday, the banks “have a structural liquidity deficit” (they have resources, they are not insolvent, but they have no cash, roughly speaking), Nabiullina said on Monday. panic fair. Russians can have deposits denominated in foreign currency — they were about 20% of total bank deposits from individuals (26% in the case of companies) in December, according to BCR statistics.

Without confidence that there will be enough dollars or euros, the devaluation of the ruble gains more momentum (we have already seen a variant of this in Argentina): it is a case of a bank run (withdrawals) and a race against the ruble (sale of the national currency).

Over the weekend, the US and allies blocked the Central Bank of Russia (BCR) from accessing its international reserves. Even so, as the sale or payment of the main Russian exports (energy, grains) were not subject to sanctions, Russia can still survive with the “money of the month” that comes in this way and, perhaps, even stabilize the market by some time.

Equity and debt markets fell in the United States and in major European Union markets, but without a more abnormal turmoil. The S&P 500, the most representative index of US stocks, dropped 0.24%. The maintenance of Russian energy supplies to Europe and the expectation that interest rates will rise at a more moderate pace (to fight inflation) have held back bigger falls. Last week, after tumbles, markets recovered losses. This week, it went back to the red.

In Russia, however, the Monday of the BCR and the Ministry of Finance was occupied by the attempt to avoid bank collapses and failures.

Despite the panic, rising interest rates and the ruble’s devaluation, Russia can still access part of its $643 billion in reserves (those not blocked by the US, EU, UK, Canada and Japan). For the rest, it can carry out financial transactions that circumvent part of the limitations imposed by the “West”. Finally, the money obtained from most of its exports is not subject to sanctions. In January, Russia had a surplus (it exported more than it imported) of $21.4 billion, mostly money made from the sale of oil, gas, grains and minerals.

In the morning, the BCR raised the benchmark interest rate from 9.5% to 20% in order to avoid further depreciation of the ruble and runs on Russian assets and banks. A dollar came to cost 118 rubles, closing at 97, but with closed financial markets and restrictions on trading, such prices are unrepresentative. The interest rate hike is an attempt to make bank deposits attractive, protect household savings from devaluation and prevent inflation.

Furthermore, the BCR took heroic steps to avert a domestic borrowing drought. It forced exporters to sell 80% of their “hard” currency (dollars, euros, etc.). Without an internationally accepted currency, Russia would not be able to pay for imports and other international commitments.

International reserves are a government’s financial savings in “hard” currencies, accepted on the international market (dollar, euro, pound, yen, gradually the Chinese renminbi). In general, they are mostly made up of investments in US or European debt securities (they are “loans” for these governments).

Nabiullina also said that the BCR should take steps to limit capital outflows. She relaxed banking prudence measures. As for the banning of Russian banks from Swift, the international bank payment system. The president of the BCR said that Russia can use alternative systems.

Without free access to reserves and under the threat of having the inflow of foreign resources interrupted, a country becomes a risky place for business. In short, money doesn’t come in if it can’t come out, for lack of “strong” currencies (dollar, euro, pound, etc.) or the risk of the country’s financial closure due to new sanctions. Russian companies may thus find it difficult to raise credit to pay for imports. New foreign investment is on the wane. Foreigners with resources in the country try to leave. Foreign companies already established in the country withdraw investments or break up partnerships.

British oil company BP, for example, will sell its stake in its sister company, state-owned Rosneft. Other European oil companies, banks and industries have announced since Friday their intention to divest their Russian businesses and partnerships. Shares of Russian companies and banks listed on the London Stock Exchange are down more than 60%, another sign of a breakout. Norway’s Sovereign Fund has said it will divest its investments in Russia. It is the largest sovereign (“government”) fund in the world, with US$ 1.3 trillion, it is a huge box of money made with oil, saved for the next generations.