Friday, March 29

The sanctions work: the ruble falls almost 30% and the Russian Central Bank raises interest rates to 20%


The ruble has collapsed this Monday in the Forex market by 27% against the dollar and the euro. The Bank of Russia, in its capacity as financial market supervisor, has decided to intervene in the country’s capital markets following the package of economic sanctions announced by Western powers over the weekend, which include the expulsion of certain Russian banks from the Swift system. or the freezing of central bank assets.

What is Swift and what does it mean to leave Russia out of its payment system

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Russia’s central bank doubled interest rates in an attempt to stabilize the country’s financial markets after unprecedented Western sanctions sent the ruble tumbling 27.02% to 119.8 rubles per dollar. For the dollar, this is a record drop since at least 1993, and for the euro it is the biggest drop since at least 1994. The regulator raised its main interest rate to 20% from 9.5% in a emergency decision, stating that “external conditions for the Russian economy have changed drastically”.

The exchange rate of the ruble began to fall in the face of the military offensive launched last Thursday by Russia in Ukraine. That day the Moscow Stock Exchange plummeted more than 33%. In a first movement, several Russian banks and sovereign debt were sanctioned, and later it was decided to exclude some financial entities from SWIFT.

The regulator has ordered brokers operating in Russia to stop any sale of securities belonging to non-residents of the country, thus preventing foreign investors from leaving the Russian financial market. Finally, the Bank of Russia has decided that the Moscow Stock Exchange will remain closed this Monday for all operations for the sale of shares or derivatives. In a brief statement, the country’s central bank, which also has certain functions of financial regulator, has alluded to the “current situation” for the closure of the stock market operations of the Moscow market.



The country’s central bank reported last Sunday that it is capable of maintaining the country’s financial stability despite the freezing of its international assets announced the day before by the United States, the European Union, Canada and the United Kingdom, in one of the toughest sanctions received by Russia since it began its invasion of Ukraine. These sanctions paralyze a large part of the 600,000 million euros in gold and foreign currency of the monetary authority.

Queues at Russian ATMs

Despite the messages from the Russian central bank, the reality is that Russian citizens have formed long queues since the weekend to withdraw money from ATMs, since the central bank lacks an obvious mechanism to stabilize its economy and its currency. .

“Simply put, Russia’s ability to transact with any financial institution globally will be severely impaired, because most international banks in any jurisdiction use Swift,” Deutsche Bank analyst George Saravelos wrote in a note. to the clients.

“Money markets could see some tightening of funding conditions this week due to the uncertain impact of the asset freeze on global liquidity. The European Central Bank, Federal Reserve and other central banks would be expected to step in to provide a powerful backstop if needed, and we wouldn’t rule out inter-meeting announcements,” the Deutsche Bank analyst said.

Forced to sell in foreign currency

Already on Monday afternoon, the Bank of Russia, in coordination with the country’s Ministry of Finance, has issued an order forcing all exporting companies in the country to sell 80% of the income they receive in foreign currency. abroad, as reported in a statement.

The order does not have an indefinite deadline, but it applies from this Monday. The governor of the monetary entity, Elvira Nabiullina, explained in a subsequent statement that this measure “will help” ensure a correct supply of foreign currency to meet the needs of importers and households.

Last Friday, the rating agency S&P Global cut the rating of Russian debt to the category of “junk”, highlighting the risk that the military assault on Ukraine could prove even more profoundly damaging to the country’s financial markets.

The economic consequences for the Russians are obvious. “The EU, Britain and the US are freezing the assets of Russian central banks, which means they cannot intervene in the currency markets. The list of airspace bans, asset freezes and travel bans on people and Russian companies is too long to list. Inflation is going to skyrocket immediately and the Russian banking system is going to be in trouble. None of this may bother Putin, but his soldiers have taken a nearly 50% pay cut since he started the war in dollar terms,” ​​explains Oanda analyst Jeffrey Halley.

“The global economy is heading towards further stagflation”

Schroders’ chief economist, Keith Wade, has stated that the “human” impact of the conflict in Ukraine is “tragic” and that “it is not yet possible to quantify its scope”, although he has considered that the events are causing “the economy to is heading towards further stagflation”. In this way, the firm has adjusted its inflation forecast upwards, due to the increase in energy prices, while it has revised its growth forecast downwards.

It anticipates that Europe will be the most affected area, while the United States and China will be less impacted by the situation. In addition, Schroders now estimates that the Federal Reserve will have a “more gradual approach” in its monetary policy, although it still foresees a first interest rate hike in March “although perhaps only by 25 basis points” compared to the 50 points forecast. earlier by some analysts.

“We now estimate that the Fed will make four rate hikes this year, instead of the five we previously expected. From there, it is likely to continue to tighten monetary policy gradually in 2023,” adds Wade.

Impact in Spain

Meanwhile, in Spain, the banking sector led the falls in the Ibex 35 due to the evolution of the Russian invasion in Ukraine and the economic sanctions imposed by the European Union on Russia. At around 11:30 am, Santander fell 5.77%, followed by Sabadell, with a decrease of 5.27%, and BBVA, which fell 4.69%. Bankinter left 3.86% and CaixaBank, 3.73%. The Ibex fell 1.69% at 11:30 a.m. thanks to the stock market boost of stocks linked to renewable energies, such as Solaria (+7.27%), Siemens Gamesa (+5.74%), or defensive stocks such as Indra ( +3.71%).

The General Council of Economists (CGE) have cut their growth forecast for the Spanish economy for 2022 by four tenths, from the previously estimated 5.6%-5.8% to 5.2%-5.4%, due to mainly to the warlike conflict provoked by the invasion of Ukraine by Russia.

According to what emerges from the ‘Financial Observatory’ published this Monday by economists, the first economic consequence of this conflict is the impact on the price of energy due to Europe’s great dependence on Russian energy, both oil, gas, or metals precious and industrial, as well as other raw materials. “Although it would have been expected that this first semester inflation would tend to moderate, these events are going to have the opposite effect,” they have warned.

Thus, the expectation of more persistent inflation throughout 2022, largely as a result of the Russia-Ukraine war, which in February has already reached 7.4%, suggests that citizens will be forced to reduce their consumption and therefore enter the vicious circle of companies reducing their production and economic growth being negatively impacted, economists have warned.

Likewise, the Council of Economists has warned that possible problems in the supply chains, which already seemed to be relaxing, could slow down production. In this sense, they have explained that the PMI Index composed of the total activity of the Euro Zone in February was 55.8 compared to 52.3 in January, confirming an intense acceleration of economic growth that, unfortunately, this situation could truncate.



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