Ruble tumbles after West tightens sanctions on Russia

Russian currency tumbles after Western nations on Saturday agreed to put crippling sanctions on the country’s financial sector in retaliation for its invasion of Ukraine.

The ruble fell around 30% against the dollar on Monday – putting it below 1 US cent – after the United States, the European Union and the United Kingdom announced measures to block certain Russian banks of the SWIFT international payment system and to restrict Russia’s use of its enormous foreign exchange reserves. The system is used to move billions of dollars across more than 11,000 banks and other financial institutions around the world.

The ruble recovered after the Russian central bank raised its key rate sharply on Monday to support the currency and prevent a run on banks. But it was trading at an all-time high of 105.27 to the dollar, down from around 84 to the dollar on Friday night.

A weaker ruble could cause inflation to spike, which could anger Russians whose budgets will be strained by soaring prices. It will also add to strains in the Russian financial system.

A sharp devaluation of the ruble would mean a drop in the standard of living for the average Russian, economists and analysts have said. Russians are still dependent on a multitude of imported products and prices for these items are likely to skyrocket. Foreign travel would become more expensive as their rubles would buy less foreign currency abroad. And the deeper economic turmoil will come in the weeks ahead if price shocks and supply chain issues cause Russian factories to shut down due to lower demand.

“It’s going to trickle down to their economy very quickly,” said David Feldman, an economics professor at William & Mary in Virginia. “Anything imported is going to see the local foreign exchange cost skyrocket. The only way to stop it will be heavy subsidies.”

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 finance ministry 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 US nationals, wherever located,” the Treasury Department said.

The Ukrainian crisis has caused turmoil in global financial markets. After outbreak on friday on reports that Russian and Ukrainian leaders will meet this week, U.S. stocks were set to open lower on Monday. Delegates from both countries sat down on Monday for their first direct negotiations since Russia launched its invasion five days earlier.

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Capital Economics estimated in a report that Russia’s gross domestic product is expected to decline by around 5% due to sanctions imposed on the country’s economy.

People who fear the sanctions could deal a crippling blow to the economy have been flocking to banks and ATMs for days, with reports on social media of long queues and sold-out machines. Moscow’s public transport department warned residents of the city over the weekend that they may encounter problems with Apple Pay, Google Pay and Samsung Pay paying fares because VTB, one of Russia’s banks subject to sanctions, handles card payments on the Moscow metro, buses and trams. .

The Russian government will have to step in to support declining industries, banks and economic sectors, but without access to hard currencies like the US dollar and Euro, they may have to print more rubles. It’s a move that could quickly escalate into hyperinflation.

To halt the rouble’s fall, Russia’s central bank raised the benchmark rate to 20% from 8.5% on Monday. This follows a Western decision on Sunday to freeze Russia’s hard currency reserves, an unprecedented move that could have devastating consequences for the country’s financial stability.

“With it is now uncertain whether Russia can even get its hands on its large stockpile of [foreign exchange] reserves (whatever the denomination), will sovereign bondholders be reimbursed?” Peter Boockvar, chief investment officer at Bleakley Advisory Group, said in an investor report. “With a 19% decline today today to hit a new all-time high for the dollar, good luck getting paid back if you hold a dollar-denominated Russian bond.”

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The ruble lost much of its value in the early 1990s after the end of the Soviet Union, with inflation and loss of value leading the government to remove three zeros from ruble banknotes in 1997. Then came a new drop after a 1998 financial crisis in which many depositors lost their savings and another drop in 2014 due to falling oil prices and sanctions imposed after Russia seized Ukraine’s Crimean peninsula.

It was unclear how much of Russia’s estimated $640 billion hard currency stack, some of which is held outside Russia, would be crippled by the decision. European officials have said at least half of them will be affected. This greatly increased the pressure on the ruble by undermining the ability of financial authorities to support it by using reserves to buy rubles.

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