Rouble plummets as Russian sanctions bite

Ordinary Russians faced the prospect of higher prices and crimped foreign travel as Western sanctions over the invasion of Ukraine sent the rouble plummeting, leading uneasy depositors to line up at banks and ATMs on Monday in a country that has seen more than one currency disaster in the post-Soviet era.

The Russian currency plunged about 30 per cent against the US dollar after Western nations announced unprecedented moves to block some Russian banks from the SWIFT international payment system and to restrict Russia’s use of its massive foreign currency reserves. The exchange rate later recovered ground after swift action by Russia’s central bank.

But the economic squeeze got tighter when the United States fleshed out the sanctions to immobilise any assets of the Russian central bank in the United States or held by Americans. The Biden administration estimated that the move could impact “hundreds of billions of dollars” of Russian funding.

US officials said Germany, France, the United Kingdom, Italy, Japan, European Union and others will join in targeting the Russian central bank.

“We are in uncharted territory of throwing all these nuclear options of sanctions at Russia at the same time over the weekend,” said Elina Ribakova, deputy chief economist at the Institute of International Finance, a banking trade group. “Throwing them all together at once like this will have a very significant effect.”

A sharp devaluation of the rouble would mean a drop in the standard of living for the average Russian, economists and analysts said. Russians are still reliant on a multitude of imported goods, and the prices for those items are likely to skyrocket, such as iPhones and PlayStations. Foreign travel would become more expensive as their roubles buy less currency abroad. And deeper economic turmoil will come in the coming weeks if price shocks and supply chain issues cause Russian factories to shut down due to lower demand.

Electronics will be a pain point, with computers and cellphones needing to be imported and the cost going up, said Kustra, who studies economic sanctions. Even foreign services like Netflix might cost more, though such a company could lower its prices.

The auto sector, a major employer, “are being hit very quickly with the ban on the import of microchips and other parts, said Chris Weafer, chief executive of Macro-Advisory, a Eurasia strategic advisory company.

As long as even a few Russian banks were spared from the SWIFT cut-off, he said, Russia would still be able to keep exporting, show modest growth this year and earn enough to subsidise or bail out big companies or employers.

“So it really does critically depend on whether SWIFT remains open or whether that last channel is closed,” Weafer said.

After the West sanctioned Russia for seizing Ukraine’s Crimea peninsula in 2014, Russia’s central bank cleaned up weak banks and prepared for a possible worsening of penalties.

“So there’s not need to fear any kind of immediate crisis or collapse” this year, he said. “It’s clearly only if these sanctions get tighter and extend over several years, the situation would clearly deteriorate over that period.”

On Monday, Russia’s central bank sharply raised its key interest rate to 20 per cent from 9.5 per cent in a desperate attempt to shore up the rouble and prevent a run on banks. It also said the Moscow stock exchange would remain closed.

European officials said at least half of Russia’s estimated $640 billion hard currency pile, some of which is held outside Russia, would be paralysed. That dramatically raised pressure on the Russian currency by undermining financial authorities’ ability to support it by using reserves to purchase roubles.

Kremlin spokesman Dmitry Peskov described the sanctions as “heavy,” but argued that “Russia has the necessary potential to compensate the damage.”

The steps taken to support the rouble are themselves painful because raising interest rates can hold back growth by making it more expensive for companies to get credit. Russians who have borrowed money, such as homeowners with mortgages or business owners who have taken out loans, also could get hit by doubled interest rates, experts said.

The rouble sank about 30 per cent against the US dollar early Monday but steadied after the central bank’s move. Earlier, it traded at a record low of 105.27 per dollar, down from about 84 per dollar late Friday, before recovering to 94.60.

AP