Long lines at Russia’s ATMs as bank run begins, ruble hit by sanctions
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Russian banks are being threatened with a run.
Russia’s rubleThe news that unprecedented sanctions were imposed on Moscow by both the EU and the U.S. in response to its invasion of Ukraine caused a dramatic drop in trading Monday.
As depositors raced to withdraw money, lines snaked along the streets and through buildings of Moscow as well as at European Russian banks. Sberbank Europe is owned and managed by Russia’s State-run Sberbank.
Russia’s central banking system announced that it would more than double its key interest rate from 9.5% to an eye-watering 20%The ruble fell 30% against the dollar in an attempt stabilize it. On the other hand, the currency traded at 119 dollars to the greenback, an all time low. Although it made some gains in later parts of the day, the currency was 20% below the closing market price at 103 dollars just before 10 pm in Moscow. Year-to-date, the ruble has fallen 28%
Capital controls were also implemented by the central banking to restrict the flow of money from the country. Elvira Nabiullina, its governor, said that the sanctions had stopped it being able sell foreign currency to help the ruble sinking.
Maximilian Hess from the Foreign Policy Research Institute told CNBC that “This is a fully-fledged bank ran that’s already underway.” According to Maximilian Hess, a Russian economist and fellow at the Foreign Policy Research Institute, “The central bank has also instituted capital controls effective 4 AM this morning. It was made public by midnight. “So that’s prevented it from being so bad as it always could be,” said he.
The capital controls mean, for example, that Norway’s enormous pension fund — which has said it will divest from its Russian holdings — cannot sell those for foreign currency.
People line up outside the Sberbank branch in Moscow to withdraw their savings. They will also close their Prague accounts on February 25, 2022. This is before Sberbank closes all branches in the Czech Republic.
MICHAL CIZEK – AFP via Getty Images| AFP via Getty Images
Hess stated that “but slowly, ways will be discovered” to bypass those restrictions. He stated that the controls are likely to remain, but they only temporarily delay the pain.
“I also expect some defaults from Russia. He stated that a full-scale bank panic is underway and that many items will be destroyed in the process.
These sanctions, which were announced over the weekend by U.S. officials and EU leaders, were much more severe than previous ones. The sanctions also saw the suspension of many Russian banks from global SWIFT payments, closure of EU airspace to Russian planes, and most importantly, the sanctioning Russia’s central bank for its transaction freeze. On Monday, Switzerland announced that it would be joining the EU’s sanctions on Russian assets. This is a significant shift from its historical neutrality.
“We will paralyse the assets of Russia’s central bank,” European Commission President Ursula von der Leyen said in a statement on Sunday. It will also freeze all transactions. And it will make it impossible for the Central Bank to liquidate its assets.”
This is significant because the Russian central bank’s massive build-up of foreign reserves — to roughly $630 billion, its highest level ever — was seen as the buffer against sanctions and consequent losses in export revenue. Russia will not be able to sell these assets for dollars or euros in the future, as it plans to freeze them. This is necessary because Russia wants the ruble’s strength to continue falling.
Russians who saw their salary and savings drop dramatically in the past few days will most likely feel this impact. Analysts predict that there will be more turmoil in the future as the ruble has fallen sharply against dollars since last year.
People queue at a Sberbank branch. In response to Ukraine’s military intervention, the United States issued sanctions on Russian banks including Sberbank, VTB, and other major Russian banks.
Vladimir Gerdo photo via Getty Images| TASS via Getty Images
KamakshyaTrivedi, global FX, rates, and EM strategist at Goldman Sachs, said, “I think that the targeting the central bank reserve is the most important piece news here.” She also spoke out about Western sanctions.
According to him, Russia’s huge foreign reserves were “the first and best line of defense against the (sanctions) on Russian local assets.” With the target of this, and the freezing those reserve assets it makes it very difficult for Russia to effectively defend the ruble under the type of pressure we are experiencing. It’s not surprising that markets are experiencing volatility today, so we can expect the ruble trading weakly.
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