Russia May Face ‘Full-On Collapse’ Of Financial System

The world moved closer on Saturday to deploying the economic nuclear option against Russia.

In a dramatic turn, Germany broke with precedent to permit weapons exports to Ukraine and indicated Berlin no longer opposed SWIFT expulsion. Mario Draghi said Italy “fully supported” weaponizing SWIFT, and Hungary’s foreign minister indicated in a social media post that his country was “not blocking anything.”

Hours later, in a joint statement, the Western powers removed some Russian banks from SWIFT.

Read more: Some Russian Banks Removed From SWIFT, Central Bank Targeted

Germany’s change of heart came as the Kremlin appeared to rule out negotiations to end the conflict. Dmitry Peskov blamed Kyiv (which Russia was still trying to seize as of Saturday evening) for what Moscow described as a failure to reach consensus on a framework for peace talks. Putin then ordered the Russian military to proceed. Germany will now send Ukraine hundreds of domestically-produced rocket propelled grenade launchers, more than a dozen armored vehicles and 10,000 tons of fuel via The Netherlands and Poland. Olaf Scholz is already considering additional shipments.

In short: Those who suggested Germany wouldn’t risk its own security (economic and otherwise) to exact a potentially devastating toll from Russia, were wrong. With each passing hour, Putin’s gambit looked increasingly ill-advised. Money and arms were set to pour into Ukraine. Weapons ranging from anti-aircraft missiles to handguns came from The Netherlands, The Czech Republic, Belgium and Slovakia, where German troops deployed to set up a Patriot system.

And, in yet another potentially dramatic development, the US was said to actively ponder a move to target Russia’s central bank and its $630 billion in reserves (figure below). According to sources who spoke to Bloomberg, the Biden administration was considering measures against the Russian monetary authority, but initially, there was no word on whether such a move was near at hand. In the same statement announcing the SWIFT expulsions, the Western powers said they were moving to “prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of [the] sanctions.”

Last week, I suggested that what many seemed to view as perfunctory language from Janet Yellen was anything but. In a statement accompanying the first tranche of US sanctions, Yellen warned that in the event Putin moved ahead with a full-scale invasion, she would do “lasting” damage to the Russian economy. Some readers (including a few who expressed their doubts via email) said Russia was at least partially inoculated from any such financial assault. I didn’t endeavor to respond because I recognized the distinct possibility that market participants would see it for themselves, possibly within a matter of weeks.

In remarks to Bloomberg on Saturday, Elina Ribakova, deputy chief economist for the IIF, explained what it would mean if the US were to sanction Russia’s central bank. “This would likely lead to massive bank runs and dollarization, with a sharp selloff, drain on reserves — and, possibly, a full-on collapse of Russia’s financial system,” she said. The ruble would “crash,” Bluebay’s Tim Ash remarked, flatly.

And that would be on top of a potential SWIFT expulsion. Bill Ackman weighed in on Saturday. “I wouldn’t want to keep money in a bank that can’t access the SWIFT system,” he said.

As of early Sunday in Europe, both the SWIFT removal and some version of measures targeting the central bank were adopted.

Just 13% of Russia’s reserves are in yuan, and late last week, China’s state-run banks reportedly began restricting dollar credit for purchases of Russian commodities. Beijing has all but demanded peace talks, even as China continues to chide the US and NATO for the usual list of grievances.

I assume I needn’t elaborate further. If Putin seizes Kyiv — and especially if any harm comes to Volodymyr Zelenskiy — the US will dynamite the Russian economy. Although none of the financial steps mentioned above appeared imminent as of Saturday afternoon, “imminent” is a relative term as it relates to the crisis in Ukraine. In the initial version of this article, I wrote that if Putin refused to stand down, it was likely that some official word on SWIFT expulsion would come next week. Instead, it came within a few hours.

“Once a bank can’t transfer or receive funds from other banks, its solvency can be at risk,” Ackman went on to say Saturday. “If I were Russian, I would take my money out now. Bank runs could begin in Russia on Monday.”

Read more: Zoltan Pozsar Cautions On ‘Market Event’ From ‘Russia’s Vast Financial Surpluses’


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15 thoughts on “Russia May Face ‘Full-On Collapse’ Of Financial System

  1. The concern here, of course, is that the line between economic warfare and physical warfare is blurry. A military blockade of Russia’s ports would be considered physical, so in what way is an economic full-on assault any less damaging economically, in Putin’s eyes? How do we walk the fine line between reigning in Putin, and making him feel desperate?

    1. “How do we walk the fine line between reigning in Putin, and making him feel desperate?”

      Dangle all sorts of face-saving inducements on condition that Russia withdraws from Ukraine. Talks on assuring Russian security, reconnecting Russia to world economy, honoring Russian history, and so on. Putin will surely be offered a climb-down option. If he doesn’t take it then the solution could be internal to Russia.

  2. H-Man, it appears things are not going well for Putin in Russia. Reports say this invasion is costing between $15B and $20B a day with reserves of +600B. But the game changer may be the Turkish drones that fly at over 5,000 feet and the number of Javelins and Stingers that are being delivered daily through Poland and Romania. A quick Google video search of these weapons suggests you or I could learn to fire one of these in about 10 minutes and then disappear to fire from another location. The missiles require no human interaction other than to point, lock the target and fire. Technology does all of the rest of the work. Helicopters, transport planes and tanks become sitting ducks. So as long as these weapons keep getting delivered, I don’t see the Russians taking control anytime soon. The Ukrainians are blowing up bridges and roads to slow the advance. Meanwhile the heroes of Snake island and the Grey Ghost provide inspiration for Ukrainians to keep fighting. So if they can keep it up and the West delivers Swift sanctions, this may take a very different turn.

    1. Since Putin has clearly stated that his ultimate goal is to forcefully reunite the republics of the USSR under his leadership, there may be anti-Russian reinforcements in transit at this time. If they understand that they are next, now is the time and Ukraine is the place to make a stand. That could be a game changer for Vlad and the beginning of his end as the Russian army transitions into an army of occupation. In which case, having all the nukes and natural gas in the world will not save him.

  3. I’m definitely happy and relieved to hear that Germany now has “skin in the game” by sending weapons, fuel into Ukraine, and now ready to expel Russia from SWIFT. Olaf Scholz will have earned a lot of respect and stature in the world by acting decisively and not being intimidated by Putin. And so I stand corrected by Mr HeisenBerg regarding my previous skepticism about Germany’s commitment to NATO. All the NATO countries have now realized that they must do everything to keep this nightmare contained in Ukraine so Article 5 doesn’t get triggered because then Pandora’s Box will truly open.

    Although I have no enmity or malice toward the Russian people, I would be thrilled to see the Russian people drain their deposits from Russian banks with a good ole’ bank run.
    Jyl and Joey bring up the excellent point about the dangers of a tyrant with a nuclear arsenal being cornered and feeling desperate. So I agree that dangling face-saving inducements will be the delicate strategy needed to placate the tyrant’s fragile ego. Russia does have a legacy of taking out its own leaders. Any likelihood of any internal Russian cleansing this time around??

  4. Yep, having USD650b in FX reserves is not so impressive if you can no longer monetise it and you’re also cut off from global funding markets.

  5. The warrior Gene is on full display in Ukraine.
    The threat of a bank run probably has every Russian Expat calling home to tell their relatives to hurry up and get that money out of the bank.
    Putin knows all too well about Turkish drones.

  6. Never under estimate the capacity of Russian people to endure pain and suffering. Their history is full of it. They are hard and proud people. I guess the bitter cold and ruthless dictators and revolutions will do that you.

    This is the first time in world history ( i know smaller scale version of it was used on Germany after world war I) that financial nuclear weapons are being used on a massive scale. Russia is mostly isolated on the world stage, its escalation and retaliatory options are (i) ban on commodity exports (ii) nuclear. The first is to cause pain to the west but will cause pain for everyone around the world including themselves. The second is well just that. Wars like these are never one sided. The west has gone all in with Financial weapons and providing physical weapons to the ukrainian. The next step is direct physical engagement between the West and Russia along Poland and Romania and article 5 invocatioon, but that would quickly lead to (ii).

    Senator Marc Rubio and few other commentators including French President Macrom indicated that something is “off” with Putin lately. Frayed nerves ? Resignation to the inevitable if he doesn’t get his way ?

    China, Israel, Turkey , India are trying to get through to Putin to stop this madness. Putin must surely see he underestimated the European back bone – he expected Germany to drag their feet. European Weapons going into the battle zone and Financial nuclear button is a huge escalation from the West. What is Putin’s state of mind at this point ? Hopefully back channel diplomacy allows a face saving way for the Russians to get off the ledge.

    Even if Russians choose the diplomatic path, and take the face saving option out, it would mean a permanent rupture with the West and would take a long time to heal the damage done. But they may calculate that the damage is already done maximally and they have nothing to loose and go all out go for not just ukraine but Luthiania, Estonia, etc… Ofcourse it could end up being just a long quagmire for the Russians where they can’t fully extricate from Ukraine to fight on another front.

    We live in interesting times….

      1. Mid terms I hope so. A local resident recently told me that Colbert should be killed… for criticizing Carlson. How do we provide face saving options for these auto cravens who love them some Tucker Carlson?

  7. In the short run there will be general happiness about all this pressure we bring to bear on Putin but be careful what you wish for. He is now a wounded animal and we will continue to stone him. If there are bank runs on Monday we would love to think that will bring him to heel. Maybe, but he has at least the second biggest stockpile of deliverable nukes and the second biggest ego on the planet. If he feels trapped and defeated with no way out who knows what he will do? Especially if he is “off.” Right now he is the most dangerous human in history.

    1. Our best hope for survival in this case is that the people surrounding Putin have more sense than our Republican party that calls the January 6 attack ‘legitimate political discourse’.

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