Sanctions wreak havoc on Russia’s financial system

Russia’s financial system has been thrown into turmoil following the imposition of sweeping sanctions by the United States and the European Union with the explicit aim of trying to bring down its economy despite warnings that the effects could escalate. spread.

Seven major banks are now excluded from the Swift international financial messaging system. Additionally, Russia’s central bank has been blocked in its international operations to prevent it from using the country’s $630 billion in foreign exchange reserves to back the currency.

The ruble has fallen around 20% from its already low levels and is now worth around a US penny in international markets. Earlier this week, Russia’s central bank doubled its base interest rate to 20% in an attempt to stabilize the currency.

People look at a screen displaying the exchange rate at a currency exchange office in St. Petersburg, Russia, Tuesday, March 1, 2022. (AP Photo/Dmitry Lovetsky)

Following the announcement of the sanctions, the exchange closed. There was no swapping of ruble-denominated bonds and the cost of derivatives to insure against a Russian default soared to 37% of the face value of the bond.

In a statement released earlier this week, Russian Central Bank Governor Elvira Nabiullina said: “The conditions of the Russian economy have changed dramatically. The banking sector is now experiencing a structural liquidity deficit. In other words, there is a major problem getting the money to run it.

The great imperialist powers have made no secret of their objectives. They are determined to break the measures put in place by the government and financial authorities to try to isolate the Russian financial system following the imposition of sanctions in 2014 in response to Crimea’s annexation to Russia.

“Fortress Russia will be exposed as a myth,” a senior Biden official said Monday.

Yesterday, French Finance Minister Bruno Le Maire was even more explicit. He said the West was using the sanctions to wage “all-out economic and financial war against Russia, Putin and his government. We are going to cause the collapse of the Russian economy.

This prompted a scathing response from former Russian President Dmitry Medvedev, now deputy head of Russia’s Security Council, pointing out the enormous dangers of the current situation.

“Today a French minister said he declared economic war on Russia,” he tweeted. “Watch your tongue, gentlemen! And do not forget that in the history of mankind, economic wars have often turned into real wars.

The Mayor replied that he should not have used the word “war”. However, he did not back down from the assertion that the purpose of the sanctions was to cause a collapse of the Russian economy.

The measures imposed so far could be reinforced in the days and weeks to come. Numerous comments have been published in the financial press that they are insufficient due to the decision not to include a ban on the sale of Russian oil and gas on international markets.

An article in the the wall street journal said it was “hard to see a complete collapse of the Russian economy as long as it can continue to sell its oil at close to $100 a barrel.”

An editorial comment in the FinancialTimes described the exclusion of oil and gas payments from the sanctions as “regrettable” but said that as long as Europe remained dependent on Russian energy supplies, sanctions on the payments would be “unnecessary”.

Even without the exclusion of Russian energy from the world market, the effect of the current measures adds to the inflationary thrust of the world economy. The price of crude soared to over $100 a barrel, the highest level in eight years. In addition to oil, prices for wheat and other grains, as well as key industrial metals, are also on the rise. The price of wheat is now at its highest level since 2008.

The price hikes are compounding the problems for the US Fed and other central banks. They decided to raise interest rates in response to rising inflation over the past year in an attempt to combat pressure for higher wages by workers who have seen their standard of living fall .

The conundrum for the Fed, which meets later this month to determine monetary policy, is that rate hikes could be conducted in a stagflationary environment. Prices are rising, but growth is falling due to the supply shock that continues to be caused by the ongoing pandemic and now rising oil prices.

There are also fears of significant ripple effects from the sanctions against Russia on the international financial system as investors in the Russian market, which has been attractive due to the higher returns earned there, are affected.

“It’s so messy,” a trader at a US brokerage firm told the FT. “If you trade something you can’t settle, you end up with exposure.” Global investors would have at least $150 billion worth of Russian securities on their books.

There is also the prospect of a Russian default on sovereign debt. According to Rick Rieder, chief investment officer for global fixed income at Blackrock, one of the largest holders of Russian government debt: “There aren’t a lot of real deals going on. Nobody wants to be on the other side.

Rieder said Russia could default on its bonds due to its inability to make payments to investors’ accounts. “It’s the difference between being able to pay and wanting to pay,” he told the FT.

An editorial in the newspaper titled “Shock and Awe of Russia Sanctions” – a reference to the massive US military assault on Iraq in 2003 – warned that urgent planning was needed to counter a possible impact on the Western financial system.

“The negative consequences could be unpredictable, with some investors being forced to sell their most liquid and secure assets, such as US Treasuries to offset the freezing of Russia-related assets,” he said, adding that the effect could “ripple through supply chains in unforeseen ways.

The FT’s Lex column warned that the global financial system was fragile, the pandemic was not over, governments were saddled with debt and the Russian financial crisis could amplify other shocks.

“The most subtle of threats are dislocations we cannot predict: the Lehman moments when panic spreads and markets crash. Small or medium business setbacks then become existential threats. War means that this threat is greater now than it has been since the early days of the pandemic.

On that occasion, in March 2020, Wall Street plunged and the $22 trillion US Treasury market froze with a total collapse only prevented by a multi-trillion dollar Fed intervention.

So far, according to US financial officials, US markets are operating normally. But the major fluctuations on Wall Street are signs of nervousness in very uncertain conditions.

Yesterday, the S&P 500 fell 1.6%, the Dow Jones lost 1.8% and the tech-heavy NASAQ fell 1.6%. The S&P 500 and NASDAQ both recorded their worst two months to start the year since 2020.

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Don F. Davis