Powerful Western sanctions rocked Russia’s financial system and triggered a spiral in the ruble, drawing the central bank into an emergency doubling of interest rates.
The Russian ruble fell as low as 111 to the U.S. dollar from 83 on Friday, a drop of more than 20% and, if sustained, the biggest single-day fall on record. But trading was spotty, with local onshore markets frozen by the central bank and markets outside Russia reluctant to trade the currency.
The Bank of Russia took a raft of measures early Monday to protect Russia’s banking system. It raised benchmark rates to 20% from 9.5% in an attempt to attract savings into banks, the largest of which were targeted by Western sanctions and will be all but cut off from international markets.
“The economic reality has changed significantly,” Kremlin spokesman Dmitry Peskov told reporters. “Now it’s important to take actions that minimize the consequences,” he said. “We will do what is in our interests.”
Investors increasingly priced the chance that Russia won’t be able to, or won’t be willing to pay off its foreign debts. The yield on a Russian dollar bond maturing in June 2027 jumped to more than 24% Monday from just under 10% Friday, according to Tradeweb.
The quick unraveling in value of the ruble will impose severe costs on the Russian economy, stoking already-high inflation and likely prompting further aggressive interest-rate increases from the Russian central bank.
Investors prepared over the weekend for a sudden reordering of the Russian economy and financial markets as a result of the sanctions. The European Union, the U.S., the U.K. and Canada announced a set of coordinated measures, including cutting some Russian banks off the Swift financial messaging system, a key piece of banking infrastructure that facilitates payments of all kinds in the economy.
They also announced a stinging set of sanctions on Russia’s central bank, seeking to neutralize the country’s $600 billion of foreign-currency reserves and sap Moscow’s ability to shore up the ruble and protect the economy from the wider disruptions of war.
Trade in the Russian ruble essentially seized. Buyers were unwilling to take the risk of holding the Russian currency amid fears that the Bank of Russia will be unable to use its reserves to support the ruble in the foreign-exchange market because of the sanctions, traders said.
“It’s absolutely chaotic,” said Paul McNamara, an emerging-market fund manager at GAM. “The sanctions are having a huge effect.”
The sanctions have scared off some banks to trade with Russian lenders. The little trade in the ruble that is taking place may be with banks from nations that haven’t imposed sanctions against Russia yet, said Jane Foley, head of foreign-exchange strategy at Rabobank.
“There is very little liquidity and consequently you get this gapping in the price and you’re not getting any real reflection of where the ruble would be,” she said.
In Russia over the weekend, long lines formed at ATMs as consumers looked to stock up on cash. A domestic run on savings could imperil the banking system, which has endured a series of crises and costly government recapitalizations since the fall of the Soviet Union.
Even before President Vladimir Putin’s decision to invade Ukraine, Russia’s central bank was having difficulty bringing inflation under control. In January, the inflation rate stood at 8.7%, more than double the central bank’s target, despite a series of rate rises starting in March 2021.
The plunging ruble and cash lines contain echoes of Russia’s financial implosion two decades ago, which set the stage for Mr. Putin’s rise to power.
In August 1998, with revenues from oil and gas weakening, the government ran out of money, and devalued the ruble and suspended payments on its debts, leading to the collapse of the banking system. Russians lost their savings, while others saw their standard of living plummet as inflation soared and goods became scarce.
His popularity during the early years of his long stretch as Russia’s leader was in large part due to the stabilization of the economy, which benefited from a rebound in revenues from oil and gas exports.
Early Monday, the European Central Bank declared a subsidiary of Sberbank, Russia’s largest bank and a target of U.S. sanctions, as failing or likely to fail. The ECB said Sberbank Europe AG and its subsidiaries in Croatia and Slovenia suffered a deterioration of their liquidity situation as customers withdrew deposits.
Russia is the world’s 11th-largest economy, smaller than South Korea, and pales in economic heft compared with the U.S. or China. Still, a major unraveling of its economy would likely blow back on trading partners and interconnected financial markets.
The country is one of the world’s largest suppliers of natural gas and oil, as well as key industrial metals used in the automotive industry. Some fear Russia may retaliate against the sanctions by cutting off shipments of its key resources.
The intensity and breadth of Western sanctions on Russia have raised concerns about their overall effect on the global economy and the potential for escalation by Russia, a U.S. sanctions expert said.
“I worry about the implications of destroying the Russian economy for global monetary and macro stability,” said Julia Friedlander, director of the Economic Statecraft Initiative at the Atlantic Council.
European companies and banks in particular have exposure to Russia. Some are already reconsidering their operations there, looking to sell or write down the value of their holdings. BP PLC said Sunday it would sell its stake of almost 20% in a Russian oil company. Norway’s sovereign-wealth fund said it would look to exit around $3 billion in Russian stocks, which represent a sliver of the fund’s $1.3 trillion in assets.