Ruble tumbles, European branch of Russian bank predicted to fail as sanctions bite

Russia’s central bank sharply raised its key rate Monday in a desperate attempt to shore up the plummeting ruble and prevent the run of banks amid crippling Western sanctions over the Russian war in Ukraine.

The ruble plunged to a record low of less than 1 US cent in value as Russia was cut off from the global bank payments system in retaliation for Moscow’s invasion of its neighbor.

The bank hiked the benchmark rate to 20 percent from 8.5%. That followed a Western decision Sunday to freeze Russia’s hard currency reserves, an unprecedented move that could have devastating consequences for the country’s financial stability.

It was unclear exactly what share of Russia’s estimated $640 billion hard currency coffers would be paralyzed by the decision by Western nations to block Russian banks from the SWIFT global payment system. European officials said that at least half of it would be affected.

That dramatically raised pressure on the ruble by undermining the financial authorities’ ability to conduct hard currency interventions.

The central bank ordered other measures to help banks cope with the crisis by infusing more cash into the financial system and easing restrictions for banking operations. At the same time, it temporarily barred non-residents from selling the government obligations to help ease the pressure on the ruble from panicky foreign investors trying to cash out of such investments.

The ruble sank about 30% against the US dollar early Monday but steadied after the central bank’s move. It was trading at a record low 105.27 per dollar, down from about 84 per dollar late Friday.

Meanwhile, the Moscow Exchange was to open forex and money market trading three hours late on Monday at 10 a.m. and will suspend trading on the repo forex market, Reuters reported.

Analysts predict intensifying runs on banks by Russians, and falling government reserves as Russians scrambled to sell their targeted currency for safer assets.

In Europe, Austria’s Financial Market Authority announced a moratorium on Sberbank Europe AG, a division of Russia’s state-owned Sberbank, Reuters reported. The FMA It said it took the measure after the European Central Bank indicated that Sberbank Europe AG “is in serious economic difficulties and that a failure of the bank (‘fail or likely to fail’) is imminent.”

Sberbank Europe said in a statement reported by Reuters that in view of “recent geopolitical developments” several of its banks had “experienced a significant outflow of customer deposits within a very short period of time.”

As a results there were, in some cases, restrictions on the amount of cash withdrawn, the bank said.

The decline of the ruble will likely send inflation soaring, hurting all Russians and not just the Russian elites who were the targets of earlier sanctions. The resulting economic disruption, if Saturday’s measures are as harsh as described, could leave Putin facing political unrest at home.

There are other early signs emerging of significant economic consequences to Russia following its invasion of Ukraine four days ago. While official quotes for the Russian ruble were unchanged at roughly 84 rubles to the dollar, one online Russian bank, Tinkoff, was giving an unofficial exchange rate of 152 rubles over the weekend.

Videos from Russia showed long lines of Russians trying to withdraw cash from ATMs, while the Russian Central Bank issued a statement calling for calm, in an effort to avoid bank runs. Reports also showed that Visa and Mastercard were no longer being accepted for those with international bank accounts.

“Banks and credit card companies dealing with Russia are going into lock down mode given the fast pace and increasing bite of the sanctions,” said Amanda DeBusk, a partner with Dechert LLP.

Russia may have to temporarily close bank branches or declare a national bank holiday to protect its financial system, analysts said.

“If there’s a full-scale banking panic, that’s a driver of crisis in its own right,” said Adam Tooze, a professor of history at Columbia University and Director of the European Institute. “A rush into dollars by the Russian general population moves things into an entirely new domain of financial warfare.”

Global market shivers

While the ruble plunges, oil prices and safe havens surged Monday fanning fears about a possible global energy crisis that could further stoke inflation.

Russian President Vladimir Putin’s decision to send troops across the border last week has sent shivers through trading floors as investors fret over a protracted war in the resource-rich region.

Adding to the unease among investors was news that Putin had put his nuclear forces on a higher alert in reaction to the latest stiff measures.

Equities rallied Friday and oil dipped as dealers assessed that the punishments imposed on Moscow were light enough to not hit its crucial oil exports — Russia is the world’s third-biggest producer — at a time when supplies are thin and demand is surging.

But the picture was changed at the weekend, when the United States and European Union said they would exclude some Russian banks from the international bank payments system SWIFT and personally targeted Putin and Foreign Minister Sergei Lavrov.

They also banned all transactions with Russia’s central bank, sending the ruble crashing, with Bloomberg saying it was indicated to be nearly 30 percent down in offshore trading Monday.

“Removing some Russian banks from SWIFT could result in a disruption of oil supplies as buyers and sellers try to figure out how to navigate the new rules,” Andy Lipow, of Lipow Oil Associates in Houston, noted.

Crude surged, with WTI climbing towards the $100 mark, while Brent bounced back above that level after slipping on Friday.

Other commodities rallied, with wheat, aluminum and nickel also sharply higher.

However, most equity markets recovered from morning selling as traders focus on a planned meeting of Ukraine and Russian officials on the border with Belarus hoping for an easing of the offensive.

Traders will be closely watching a meeting this week of OPEC and other major producers led by Russia, where they will discuss plans for further output.

The group had agreed previously to increase production gradually each month, but the Ukraine crisis could throw those plans into disarray.

Gold and the yen, go-to assets in times of uncertainty, rose, while the dollar was up against all other currencies.

The euro was under pressure owing to Europe’s reliance on Russian energy.

The surge in prices is adding to worries about inflation, which is running at a 40-year high in the United States, with central banks already fighting an uphill battle to get it under control.

The conflict is “likely to boost energy prices significantly, resulting in immediate inflationary effects and a large drag on global growth,” Silvia Dall’Angelo, senior economist at Federated Hermes, wrote in a note.

“It’s fair to say that the crisis increases the room for central banks’ policy mistakes.”

Markets in Tokyo, Shanghai, Sydney, Seoul, Mumbai, Manila, Wellington and Bangkok were all up, though there were some losses in Hong Kong and Singapore.