- Russia’s central bank has doubled interest rates, banned foreigners from transferring money and taken other measures in response to Western sanctions.
- The Russian economy is in turmoil and the ruble is worth less than a penny.
- Two experts have explained what the Russian central bank could do next.
Western sanctions are hitting the Russian economy and its central bank has maneuvered in every possible way to prevent economic collapse.
Last weekend, Russia’s central bank doubled interest rates, scooped up gold domestically to shore up its finances and said Western countries could not withdraw from Russian investments.
Russian banks have struggled after being banned from SWIFT interbank messaging systemand on Wednesday the central bank announced that it was witnessing an enlargement cash shortage as its citizens run a bank run.
“The central bank must have access to foreign exchange reserves to stop the [bank] run, but with G7 sanctions preventing access, the domestic economic situation is likely to deteriorate further,â€ John Breen, senior global risk analyst at the intelligence firm SibyllineInsider said.
Russia kept its stock market closed all week, and some index traders deemed Russian stocks “uninvestable.”
The ruble cratered, and the European Commission said last Saturday that the allies would “cripple” more than $630 billion of the Russian Central Bank’s international reserves.
“The sanctions have seriously undermined the tools of the Russian central bank to prevent economic collapse,” Breen said. It was Russia’s foreign exchange reserves that helped them cushion the impact of Western sanctions in 2008 and 2014, he added, and these are not currently available.
Dozens of foreign companies have shut down their business activities in the country and top fund managers have frozen at least $3 billion in assets exposed to Russia.
â€œRussian banks owe a lot of money to Western lenders and those assets will likely be wiped out with the massive default by Russian creditors,â€ Breen said.
On Wednesday, Russia banned brokers from selling securities on behalf of non-Russians, imposed limits on foreigners trying to transfer money out of the country and said they would not be able to collect payments bond coupons on Russian debt.
The major rating agencies all downgraded Russia’s creditworthiness to junk status this week.
What happens afterwards?
Although it will be extremely difficult for Russia’s central bank to navigate the coming weeks, a next step for the central bank could be to take a closer look at its energy reserves, Breen said, as oil and gas remain the main sources of income for Russia.
The central bank could also try to negotiate with China, because China holds 13.8% of Russia’s foreign exchange reserves, according to Breen. China could also help strengthen the ruble.
“The Russian Central Bank [could look] change the benchmark currency from ruble to Chinese yuan,â€ Breen said.
But since China and Russia recently reached a 30-year gas deal in euros, this option may not be acceptable. Breen noted that cooperation from Beijing is not guaranteed, as Western sanctions could target China for helping Moscow.
While Ukraine has used cryptocurrencies, Russia likely won’t be able to do the same, according to Ari Redbord, head of legal and government affairs at blockchain and risk management firm, MRT Laboratories.
“I don’t think cryptocurrency is a reasonable way out for sanctions busting,” Redbord told Insider. Given the size of the Russian economy, he doesn’t think the Russian bank would be able to design a viable, last-minute blockchain solution with sufficient scale.
The open ledger nature of the blockchain will make it difficult for the government to move a large amount of crypto, as global regulators will be able to see it.
“The combination of the lack of
in the crypto market to support the Russian economy, along with strict compliance checks at the biggest crypto exchanges will make it impossible for the Russian central bank to move even one crypto,â€ Redbord said.
“There’s not much Russia can do internally given the interconnected nature of the global economy,” he said. “These next few months will be a very, very difficult period for the Russian bank.”