The currency has slumped. Interest rates have risen from 9.5% to 20%. Capital controls may follow. It shows how isolated Russia has become
ON MONDAY, as financial markets began trading in Asia, the value of the Russian rouble collapsed. The cause was harsh Western sanctions introduced over the weekend. In effect these freeze Russia’s foreign currency reserves and begin to lock Russian banks out of the SWIFT network for arranging international transactions. The US dollar rose by as much as 40% against the rouble, taking the Russian currency from its Friday closing level of around 84 to the dollar to as high as 118, a new record.
The country’s central bank has ordered financial institutions to reject the instructions of foreign clients attempting to sell Russian securities, a move that may be the beginning of controls to prevent massive outflows of capital. Any ban on foreign investors from getting out their money could sour what little is left of the country’s reputation as an investment destination. Over the weekend, Russian citizens queued outside banks to withdraw their money.
The threat of more severe sanctions has become increasingly real since financial markets closed for the weekend on February 26th. The announcement that America, Britain and the European Union would target the Russian central bank and its ability to sell its $630bn in foreign-exchange reserves, much of which are held in overseas custody, could frustrate Russia’s ability to defend the value of its currency. On Monday morning, the EU prohibited all transactions with the Central Bank of Russia.
But recent international sanctions mean that banks overseas will hesitate to participate in any workarounds that could violate incoming sanctions. In 2020, when the American Treasury Department imposed sanctions on political and security figures in Hong Kong, even Chinese banks in the territory would not hold accounts for those who had been targeted. The reason is that they were fearful of losing access to dollar-denominated payment and settlement.
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