By Andrew Moran
Since President Vladimir Putin invaded Ukraine, the international community has pummeled Russia with a series of financial penalties and economic sanctions targeting leaders, state-owned firms, and financial systems.
Is Moscow at the point of no return?
The Russian ruble fell to an all-time low of 119.25 per dollar on Monday, losing about 32 percent of its value against the greenback since Putin initiated an invasion of his western neighbor. The ruble is now worth less than a U.S. cent following tighter sanctions, a SWIFT ban, and governments across the globe ordering banks to freeze Russian assets.
The Central Bank of Russia responded to the additional sanctions and crash in the ruble by more than doubling the benchmark interest rate to 20 percent.
Speaking at a news conference on Monday, Elvira Nabiullina, the institution’s governor, averred that the central bank would employ additional measures to offset the capital flight by non-residents and restrict the sale of rubles and bonds. She added that the influx of sanctions has impacted the currency and limited how much Moscow could use its gold and foreign exchange reserves.
The European Commission confirmed that the bloc and its Western allies would impose restrictive measures on Russia’s enormous international reserves, effectively making “it impossible for the Central Bank to liquidate its assets.”
Moscow currently possesses a $630 billion war chest that includes gold and forex reserves.
“Putin’s war chest of $630 billion of reserves only matters if he can use it to defend his currency, specifically by selling those reserves in exchange for buying the ruble,” a senior U.S. administration official told reporters on a conference call.
“After today’s action, that will no longer be possible and ‘Fortress Russia’ will be exposed as a myth.”
Some reports suggest at least one-third of its reserves are off-limits to the government.
The latest developments have prompted powerful oligarchs to call for peace as soon as possible, with many feeling some consternation over the extraordinary measures the Kremlin is taking to prop up the currency and cushion the economic blows from the Western sanctions.
“A hiked rate, the mandatory sale of foreign currency … this is the first test of who actually will be responsible for this banquet,” Oleg Deripaska, a billionaire businessman, wrote on Telegram on Sunday. “I really want clarifications and intelligible comments on the economic policy of the next three months.”
The growing consensus on Wall Street is that Russian assets are becoming “uninvestable.”
Kamakshya Trivedi, co-head of foreign exchange, rates, and emerging market strategy at Goldman Sachs, told CNBC on Monday that the ruble and a wide range of assets would experience “more significant pain and volatility.”
Early estimates suggest that the gross domestic product could decline by 5 percent.
Since the start of the Ukraine invasion, Russian stocks have come under intense pressure.
The VanEck Russia ETF has plunged 53 percent over the last week, while the Direxion Daily Russia Bull 2X Shares fund has cratered by more than 90 percent and will be closing on March 11.
“The ratcheting up of Western sanctions over the weekend has left Russian banks on the edge of crisis,” wrote Liam Peach, an emerging market economist at Capital Economics, in a note on Monday.
Since 2014, when Russia annexed Crimea, the Eastern European nation has been living under economic and financial sanctions. In response, domestic officials focused on reducing the country’s dependence on global capital markets, replenishing national reserves, accelerating its de-dollarization push, and creating financial systems alternatives to SWIFT or MasterCard and Visa.
For now, will Russia’s economic struggles have a ripple effect beyond its borders?
Inflationary pressures will be the biggest concern, says Fergus Hodgson, the director of Econ Americas.< “Russia is far from the top U.S. trading partner and likely to suffer much more than the United States,” Hodgson told The Epoch Times. “The tragedy is that this conflict will cripple investment in Russia, Ukraine, and other nations in the Russian sphere of influence such as Belarus, Georgia, and Moldova. That dried up investment will permanently dampen economic development.” Because many advanced economies have diversified their trading partners, the list of countries totally dependent on Russia is small. However, many market analysts’ primary fear is that President Putin would decide to withhold crude oil and natural gas exports in retaliation for the pecuniary penalties, leaving Europe in a vulnerable position. Russia is the world’s third-largest producer of oil and the second-largest producer of natural gas. Europe relies on Russia for 40 percent of crude and 30 percent of natural gas purchases. The U.S. buys between 7 percent and 10 percent of its oil demand from Moscow.
But while embargoes on Russian oil and gas products are being discussed by commentators, Hodgson does not think this would be the death blow to Moscow and its invasion of Ukraine.
“We have seen this played out many times. Authoritarian regimes are willing to let the people suffer, so long as power remains in regime hands,” he said.
Meanwhile, the situation could force central banks to postpone engaging in a tightening cycle, notes Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
“Rising energy and commodity prices put a further pressure on the global inflation and leave the central banks in a difficult position to readjust their post-COVID policies,” she said in a note. “The RBA (Reserve Bank of Australia) maintained its policy rate unchanged at today’s meeting for the 15th month in a row as expected, citing that the war in Ukraine is a new major source of uncertainty.”
In the end, strategists contend that the myriad of financial repercussions bombarding Russia might have a minimal impact on global growth prospects. The world economy might only be significantly affected if the world installs restrictions on Russian energy or Putin reduces shipments, experts say.