Ruble turns to rubble but experts believe Russia can weather storm
Areport on AP News has outlined how Russia has been preparing for tougher sanctions since 2014, though the impact of a new round of sanctions implemented after Russia’s invasion of the Ukraine is still being felt by its people.
On Monday, Russians queued at ATMS to withdraw cash as the Russian currency, the ruble, plummeted 30 per cent against the US dollar after Western nations announced unprecedented moves to block some Russian banks from the SWIFT international payment system and to restrict Russia’s use of its massive foreign currency reserves. The ruble, however, regained some value after quick action by Russia’s central bank. Earlier, it traded at a record low of 105.27 per dollar, down from about 84 per dollar late Friday, before recovering to 94.60.
People in some central European countries also rushed to pull money from subsidiaries of Russia’s Stateowned Sberbank after the Russian parent bank was hit with international sanctions.
But the AP report outlined how the country has moved to produce many goods domestically, including most of its food, to shield the economy from sanctions, quoting Tyler Kustra, an assistant professor of politics and international relations at the University of Nottingham. Kustra however told the news agency that he expected some fruits, for example, that can’t be grown in Russia “are going to be suddenly much more expensive”.
Electronics will be a pain point, with computers and cellphones needing to be imported and the cost going up, said Kustra, who studies economic sanctions. Even foreign services like Netflix might cost more, though such a company could lower its prices.
Those in the auto sector, a major employer, “are being hit very quickly with the ban on the import of microchips and other parts”, said Chris Weafer, chief executive of MacroAdvisory Limited, a Eurasia strategic advisory company.
As long as even a few Russian banks were spared from the SWIFT cut-off, he said, Russia would still be able to keep exporting, show modest growth this year, and earn enough to subsidise or bail out big companies or employers.
“So it really does critically depend on whether SWIFT remains open or whether that last channel is closed,” Weafer said.
After the West sanctioned Russia for seizing Ukraine’s Crimea peninsula in 2014, Russia’s central bank cleaned up weak banks and prepared for a possible worsening of penalties.
“So there’s not need to fear any kind of immediate crisis or collapse” this year, he said. “It’s clearly only if these sanctions get tighter and extend over several years, the situation would clearly deteriorate over that period.”
The ruble slide conjured ugly memories of previous crises. The currency 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 lop three zeros off ruble notes in 1997. Then came a further drop after a 1998 financial crisis in which many depositors lost savings, and yet another plunge in 2014 due to falling oil prices and Crimea sanctions.
On Monday Russia’s central bank sharply raised its key interest rate to 20 per cent from 9.5 per cent in a desperate attempt to shore up the ruble and prevent a run on banks. It also said the Moscow stock exchange would remain closed.
European officials said at least half of Russia’s estimated $640 billion hard currency pile, some of which is held outside Russia, would be paralysed. That dramatically raised pressure on the Russian currency by undermining financial authorities’ ability to support it by using reserves to purchase rubles.
Kremlin spokesman Dmitry Peskov described the sanctions as “heavy” but argued that “Russia has the necessary potential to compensate the damage”.
The steps taken to support the ruble are themselves painful because raising interest rates can hold back growth by making it more expensive for companies to get credit. Russians who have borrowed money, such as homeowners with mortgages or business owners who have taken out loans, also could get hit by doubled interest rates, experts said.
Still, there are those who believe that even with the sanctions, Russia is set to benefit from higher oil prices.
That’s because while the West is squeezing the Russian economy by mainly targeting its banks, it is glaring that its oil and gas industry have been largely spared.
Following Russia’s invasion of Ukraine, Biden defended his decision to preserve access to Russian energy in order “to limit the pain the American people are feeling at the gas pump”.
The rules issued by the US Treasury Department allow Russian energy transactions to keep going through nonsanctioned banks that are not based in the US, and Administration officials stress that the sanctions are designed to minimise any disruptions to the global energy markets.
Traders had not driven up prices in recent days because Western sanctions against Russia have so far not impeded the export of oil and natural gas to Western Europe. But the Brent oil benchmark climbed more than 3 per cent Monday to above US$101 a barrel while the American West Texas Intermediate benchmark climbed to about US$95 a barrel.