Desperate Russians Race to Withdraw Cash as Sanctions Send Currency Into Freefall

[Rogue Valley]

Desperate Russians Race to Withdraw Cash as Sanctions Send Currency Into Freefall

2.28.22
Russian President Vladimir Putin had every right to think that the threat of sanctions if he invaded Ukraine would fall flat. After all, when his troops stormed in to annex Crimea in 2014, the European Union limited some of Russia’s financial dealings—which ended up costing Europe as much as it did the Russian economy, and over time actually deepened the continent’s dependence on Russian gas and other exports. Putin undoubtedly thought Russia’s tentacles in the European economy were too deep to sever. But all that is quickly changing after the European Union started putting pressure on the usual holdouts, including Germany, which wanted to exempt gas from the list of sanctions; Italy, which wanted to exempt luxury goods; and Hungary, which didn’t agree with sanctions at all. With the EU now in full alignment over the most painful sanction of all—the removal of Russia from the SWIFT international currency network—Putin is feeling the pain. On Monday, the first day of trading since the fresh sanctions took hold, the Russian economy was in free-fall. The Russian ruble fell 30 percent against the U.S. dollar to an all-time record low and Moscow hiked interest rates to an emergency 20 percent level.

Russia’s central bank chose not to open trading at the Moscow exchange on Monday morning to try to stall 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 Exchange today,” the bank said, according to media reports. As Russians lined up at ATMs across the country out of fear that cash could be in short supply, Russia’s Central Bank appealed for calm. That fell on deaf ears, despite Kremlin promises that it has “the necessary 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. This weekend’s events now mean that no G7 banks will be able to buy Russian rubles, sending the currency into free-fall, with the end result we could see a huge inflationary shock unfold inside Russia.

Elvira Nabiullina, in my view Russia's finest economist and head of the Central Bank of Russia, cannot save the Russian economy this time. Only five days into this and 50% of the wealth that was stashed to prop up the Russian economy is frozen abroad. Interest rates shot up from 9% to 20%. Lines have formed at banks and ATM's so people can withdraw a ruble that is now worth almost nothing. Russia cannot sell bonds and derivitives in the West to raise any money. When the SWIFT sanctions kick in, Russia will not be able to digitally transfer money in or out from abroad. This will make countries and businesses shun doing any business with Russia. Credit cards will stop working for Russian citizens. Supply chain problems will exponentially become worse. Store shelves will begin to empty. With the ban on digital chips, many factories (like auto factories) in Russia will have to cease production. The assets of Russian oligarchs in Europe will be frozen or confiscated. China cannot tie their hurting economy to the sinking Russian economy. In another four weeks, life in Russia will be drastically different than it was pre-invasion. This may be worse than the economic isolation of North Korea.