The Russian economy was plunged into an overnight crisis Monday, after the Western powers moved to sever the country’s SWIFT access and took aim at the central bank’s reserves.
In a flurry of desperate actions, the Bank of Russia raised rates to 20%, the highest in nearly 20 years, citing the necessity of protecting savers as the currency collapsed.
“External conditions for the Russian economy have changed dramatically,” an announcement from the bank’s press service said. “An increase in the key rate will make it possible to ensure an increase in deposit rates to the levels necessary to compensate for the increased devaluation and inflation risks,” the bank added, citing the need to “protect citizens’ savings from depreciation.”
There was scarcely any liquidity. The start of ruble trading was delayed by three hours, but the currency lost a third of its value on the offshore market. Initially, there was a yawning gap between Moscow-quoted rubles and international markets. The dislocations were described as unprecedented. The situation is dire (figure below).
Limited capital controls were introduced, and economists expect additional measures. The stock market didn’t open. “Due to the current situation, the Bank of Russia has decided not to open… the Moscow Exchange today,” another release said.
The ruble’s losses were the largest since 1998, when the country’s economy last collapsed and the government defaulted. Shares of Russian companies traded in other locales simply imploded. Sberbank fell almost 80% in London (figure below). Gazprom more than 60% at one juncture.
Putin met with his top economic officials and Elvira Nabiullina was set to speak to the nation in an afternoon address in Moscow.
In the simplest possible terms, it’s over. Just like that. I tried to emphasize how quickly this could happen last week, but the point was lost on some readers, likely because the Kremlin has been adept at leveraging propaganda over the past half decade to suggest the Russian economy and financial system somehow managed to partially decouple and that the West needs Russian gas more than Russia needs access to the Western financial system. None of that is true. Nor was it ever true. Now you’re seeing just how absurd such claims were.
Consider the gravity of this. The central bank’s reserves are trapped. They can’t stop the ruble from depreciating. Rate hikes will only “compensate” locals if the currency doesn’t continue to plunge. They (rate hikes) are meaningless when it comes to attracting foreign capital because no foreign capital is going to go anywhere near Russian assets. If it does, Janet Yellen will target it. As one economist told Bloomberg Monday, the central bank is desperate. And Russia can’t stop pumping gas, because if they do that, where would the money come from? “Because Russia can’t access its reserves, it’s dependent on income from gas deliveries,” Karsten Junius, chief economist at Bank J. Safra Sarasin said. If they turn off the spigots, they’ll have no foreign exchange.
If things don’t improve, Putin will have to resort to a deposit protection scheme for Russians, à la Recep Tayyip Erdogan’s recent program announced in conjunction with a series of wildly misguided rate cuts in Turkey. But it’s unlikely to work in a panic. Russians want hard currency. They won’t listen, which means Putin will probably have to compel them to keep their savings in rubles, first with capital controls and then, if that doesn’t work, by force. Russians continued to line up at ATMs around the country.
Russia’s reserves (that “war chest” so many market participants pointed to as evidence that Putin’s Russia was “resilient”) is now mostly blocked. And the sanctions levied last week effectively shut the government and all critical Russian companies out of Western capital markets. Without access to their reserves and lacking the capacity to raise any new hard currency through debt issuance, the only option is to somehow repo their gold via backdoor deals with friendly central banks. That’s not an overnight process. And somehow we’re supposed to believe they’re going to stop shipping energy? That was always laughable. That’s no threat. If Putin does that, the country will be literally broke. All they’d have left is a pile of bullion and increasingly worthless rubles which they’ll have to keep printing in order to compensate savers for ongoing depreciation, even as the very act of printing accelerates the depreciation process in a ruinous spiral.
Finally, don’t let it be lost on you that the West may decide to risk its own energy security by putting an embargo on Russian energy. If that happens, and it lasts longer than a few weeks, Putin could lose his grip on power.
Meanwhile, Volodymyr Zelenskiy on Monday asked the EU to create a “new special procedure” to “immediately accept” Ukraine. “We deserve this, and I am sure it is possible,” he said. His request came as the EU approved nearly a half-billion in arms supplies to Ukraine.
This is shaping up to be one of the most foolhardy military adventures in modern history. Putin has brought ruin on his country in less than one week.
I was so dispirited when I logged off on Friday. The weekend has done much to restore my faith in liberal democracy. When the history of this period is written, historians (who are not white nationalists) will put Joe Biden in the Churchill column — no lie — and Trump, Bannon, and much of the GOP in the Lindbergh/Chamberlin/Edward VIII/Petain column.
Cornered and loosing everything, what will Putin do next? Will he loose power before he does something worse than ruining his country?
This is the wild card. Putins’ grievances are too deeply ingrained. He must know that the events that he has set in motion back home have him staring into the abyss.
+1 ; it would be nice if we could offer some kind of way out to Putin before he sees no alternatives to threatening nuclear warfare if we don’t give him Ukraine…
Ultimately, this financial pressure doesn’t harm Putin as much as it harms his Oligarch enablers. I am hearing this morning that a couple of them are starting to sour on his fool’s errand to invade a country who’s people will never accept Russian rule. Authoritarian leaders are not themselves able to hold on to power. They are only allowed to by those who support an enable their existence. You see this going on now with the body armored police abusively arresting peaceful protestors all across Russia. Tyrannical rulers rely on those individuals who are willing to do what they imagine their leaders want them to do. However, Putin is only propped up by the money power in his failed state. Those Oligarchs are now being hurt in the one place they care about, their finances. I believe their pain will ultimately be his undoing. However, his ridiculous failure to invade a brother country has galvanized the west and restored the strength of democracy, so I guess we should all be thanking him.
Mikhail Friedman and Deripaska spoke out. I wonder if they are inside or outside Russia. If the Swiss start to freeze oligarch assets, it could be game over.
Thank you Switzerland! So, who in Russia likes Vlad now? Oligarchs can’t get their Swiss money, can’t fly to their UK estates. Middle Class folks are lining up at banks to get their depreciated savings. They can’t travel abroad anymore. Genrals look stupid because theu have underperformed. Wait till coffins start to come home.
What happens if Russia and Putin survive this? What does that mean for us? Do our weaknesses become exposed?
What weaknesses? This crisis should be a wake up call for everyone around the world pitching some version of the American decline narrative. America is in decline, but not nearly as fast as foreign propaganda would have you believe. America has the strongest military (just barely — PLA), a massive nuclear arsenal and, crucially, a total monopoly on the world’s reserve currency. Washington, as dysfunctional and broken as it is, can bring any other country on earth to its knees virtually overnight in one way or another. Where America screws up is getting itself involved in intractable local conflicts where the dollar doesn’t make any difference and where deploying nuclear weapons doesn’t make any sense. We’re no good at asymmetric warfare and we’re terrible at wars of attrition, ironic because America was founded on the most successful example of asymmetric warfare in modern history. Outside of that, though, there’s not much we’re “weak” on. Being in decline is not the same thing as being weak. Some empires collapse quickly and when the end is nigh, the collapse usually accelerates rapidly. But sometimes, it takes centuries for empires to fall. Putin just discovered that America can cripple him without firing a shot. China knows this too, by the way, which is why Xi is playing the long game. He knows China can outlast America. But he also knows fighting a financial war with the USD in the near-term is a suicide mission. And so is seizing Taiwan. So he doesn’t try. What does he do instead? Well, he takes what he can: Hong Kong’s freedom and chips away at dollar hegemony with a tiny, tiny chisel by internationalizing the yuan at a pace so glacial that it’s hardly perceptible. Xi will never find himself in the predicament Putin is in now.
The lesson to be learned from a half century of failed “freeing” of communist nations is that we shouldn’t pick a fight nobody there wants us to win. Ukraine obviously wants to remain free and independent, that’s an easy horse to back. And yes, we have demonstrated the sheer power the US has, one that doesn’t require military action to demonstrate that. This past week is also evidence that our military engagements in Iraq and Afghanistan were completely unnecessary. We could have rallied our allies to financially cripple those nations instead with much greater effect than the unpopular wards we waged. Working together with other democracies will always be a more powerful show of force than going it alone, as much as some in this country would prefer that strategy.
The biggest ‘cost’ of the Iraqi War was the US loss of the moral high ground.
When you see Bush admonishing Putin he shouldn’t invade countries based on lies, it fu*king hurts and the Iraq War makes the world distrusts the US in its role as the world enforcer of international rules.
+1 on American decline vs. weakness
re. Xi, I’m a bit less convinced. He really wants Taiwan and was clear he was fed up with kicking the can down the road. OTOH, for sure, he’s leaning from Vlad’s mistake and won’t be caught repeating it.
Once again a very concise and thoughtful article. I do believe Purim’s days may be numbered. I am sure the Oligarchs have been on the phone to their banks to see if there assets have been frozen, once it is confirmed it will be clear that Putin has to go. My hope is that Biden takes the unprecedented step of freezing Putins assets , so they can be given back to the Russian people, where they were stolen from.
I also believe that once the Russian soldiers pay is frozen they will be going back to Russia. My hope is that not only are the Russian troops sent back to Russia from the parts of Ukraine that they have entered in the last week. I hope Russia is required to give back the Crimeria and the other sections that Russia stole.
Did you see the Bitcoin pop at the US open? I’m guess, the Russians that can access their offshore accounts are buying. It won’t do anything on a large enough scale to counter the West’s sanctions, but an interesting phenomena. I would expect BTC vol to go up compared to recent past. Yes, I understand the absurdity of that sentence 🙂
If BTC becomes a significant avenue to evade sanctions, BTC may be targeted for sanctions. Most governments would welcome an(other) excuse to clobber (non-governmental) crypto.
Good points from both of you. Recall four or five years ago when the Chinese sought to clamp down on capital flight. The PBOC restricted many of the traditional vectors so cryptos went bid as Chinese citizens sought another way out.
No doubt that helps explain why the PRC is trying to ban cryptos, except for their own.
I am revealing my ignorance of central banks and all of currency exchange matters. One of the reasons I signed up for this news letter was to slowly get a better understanding of the financial workings of the world. So I readily admit my ignorance of the entire processes discussed in this letter. But it strikes me that it is unjust of a banking system to freeze or “grab” the assets of a country and block the country from accessing what belongs to them. Are we saying that it is just to keep Russia from accessing bullion and cash that belongs to them and that they could use to protect their currency?
I think what we’re saying is that if you want to take something by force that is not yours — the right of the Ukrainian people to self-determination and a government of the people, by the people — well, back atchya. Except we, the liberal democracies for which so much blood has been shed over the last 100+ years, won’t use force; we’ll use computers.
Perhaps “injustice” starts with invading, killing, destroying and what comes next is “consequences”.
First, their gold is theirs. We can’t take that. Read the Poszar articles. Second (and to your larger point), what we’re saying is that if you choose to risk a global conflict by creating a security crisis in Europe and you continually (i.e., for years) parrot the manifestly absurd notion that you’ve somehow inoculated yourself from the USD, we’re going to call your bluff on that, with disastrous, overnight consequences for your economy. The tragedy isn’t the “injustice” of it, the tragedy is that, for a half-decade, Russia and its various propaganda portals in Western nations (one of which masquerades as a financial website catering to American audiences) perpetuated the idea that Russian citizens needn’t worry what their autocratic leader did on the world stage because Russia was buying gold and building up record reserves. People came to believe that, despite it being manifestly absurd. The US Treasury always retained the capacity to turn Russia into Iran or Venezuela virtually overnight. Russia and its arm’s-length propaganda outlets, including some finance-focused portals, were lying. Yellen (and US allies in Europe) called that bluff over the weekend. 24 hours later, the fragility of “mighty Russia” was laid bare in the form of bank runs and an overnight currency collapse. You may think it’s cruel, and unfair, but so is invading Ukraine. Here’s the bottom line: If Putin doesn’t stop, Yellen will engineer hyperinflation in Russia. Just six days ago, I told readers that what happened on Monday (the ruble collapse, the bank runs and the stock market having to just stay closed) was probably going to happen. Some people scoffed. Those people didn’t know what they were talking about. Now I’m telling you that Putin faces hyperinflation if he doesn’t bend the knee. So, we’ll see what happens.
People don’t change with a driving force. Russians don’t like Putin but have been content to endure him. We are forcing them to feel the pain of his actions which will which ideally encourage them to force their own regime change. I hope that change is towards Democracy but that seems like a reach at this point.
I just read on Seeking Alpha that Russia said it was resuming purchase of gold in their domestic market after two years of standing aside. It seems that Russia is banking on gold to back its currency. What if gold ends up outperforming the US Dollar? Would not Russia be the economic winner in that and the US be the economic looser? Maybe that is their economic war on us? Time will tell….
No, Robert, this doesn’t make any sense. Russia can’t buy enough gold to institute a credible gold peg. They can’t “back” the ruble with gold. They (basically) took the currency off a free float today, and I guess they’re going to try to establish some kind of band, but the idea that the ruble is going to somehow come out of this as some kind of figurative and literal gold standard currency that everyone in the world wants is (forgive me) laughable in the extreme. You have to buy gold with something. They don’t have any dollars. The ruble fell 30% today. Would you want to give up your gold for rubles? No? Well then why would anyone outside of a captive domestic market do it? What are they going to do? Sail around the world and barter physical barrels of oil for ships loaded with literal gold bullion? What happens when Janet Yellen sanctions all transactions involving Russian oil and gas? Who would they barter with? Somali pirates?
Also this, Robert, from TD: “[Russia] would likely find it extremely difficult to find a counterparty willing to do a location swap with gold located in a Russian vault. This would leave physical delivery (in a way which isn’t sanctioned) as the next outlet.”
Thank you for your timely and personal reply. I’m thinking on it.
The risk for us is that we might not be successful in bringing them to their knees if their gold is stronger than our dollar.
Robert, Did you not read the Zoltan article? Here: https://heisenbergreport.com/2022/02/27/pozsar-conjures-lehman-amid-russia-swift-ban/
Russia needs to effectively launder that gold via a backdoor, sanctions-evading relationship with a friendly central bank that’s willing to repo its own Treasurys on their behalf. Gold doesn’t work the way you seem to think it works. Commodities are settled in dollars, just like damn near everything else. They have to (must) find a way to source hard currency. The gold is useful, but its cumbersome and it simply isn’t a substitute for dollars, pounds and euros.
Here, from Zoltan:
“Central bank deposits, bank deposits, and securities are all “inside money” – that is, money and money-like claims that are someone else’s liability – and it’s situations like this when “outside money” – money claims like gold bullion that are no one’s liability – is king, especially if stored in vaults domestically. Unlike balances at the Deutsche Bundesbank, western G-SIBs, or Euroclear, you control what you have. Gold is a sovereign’s money under the mattress, and the BoR has more of it than deposits at foreign central banks. Gold can be pledged under repo operations to cover one’s dollar needs with a willing, collateral-rich central bank that has enough Treasuries to repo, or perhaps even the BIS (which owes its origin to reparation payments), and one can accumulate dollar surpluses anew through ongoing commodity exports away from financial centers in the West by seeding financial centers in the East”
Note what’s implicit (and explicit): “Dollar needs.”
There are always dollar needs or, at the least, hard currency needs. Gold isn’t a substitute. In this case, it’s a means to an end: Obtaining dollars by pledging it in backdoor deals with an un-sactioned central bank which in turn pledges its own USTs.
Russia is toast soon. I would bet Putin will not be leading Russia by the end of this year if not sooner. The two Russian factions that back him- oligarchs and the military are soon going to be looking for alternatives. Kruschev suffered the same fate after the Cuban missile crisis. The generals got rid of him for being too big a risk taker. Putin kept doubling his bet and this time he is likely to lose it all. But that makes things even more dangerous for Ukraine. A cornered animal is dangerous indeed. It will be interesting to see what happens to Putin and Russia as a result of this. As for the GOP, this crisis is probably not working to their advantage for now. Their dreams of a midterm sweep probably just evaporated, although it is still possible for them to make some inroads here and there.
The announcement by the Swiss this morning was telling, accompanied as it was by the suggestion that Swiss officials don’t think Russia will resort to the use of nuclear weapons. That tells me that certain people in the Swiss government have heard from certain people in other Western governments that certain people in the Russian government have assured them that if Putin were to go mad dog, the generals in control of the Russian nuclear arsenal would shut him down. Putin’s time may be dwindling down to days, not weeks or months.
Let’s hope so, for everybody’s sake.
As usual, I totally agree with everything you said. But every time I read the ‘cornered animal’ analogy I have to think that Putin is just a bully in dire need of a butt kicking. Once his economy and his army are crushed, and they will be, we will see a kinder gentler Russia at home and on the world stage. I hope the world leaders have the guts to transfer all of the frozen Russian oligarch’s assets to the Ukraine as reparations.
OK, Russian people…please take to the streets…they can’t arrest all of you…
Those who have protested already are very brave. They know the risks. Putin relies on them being compliant through fear.
yeah MSNBC reporting 6000+ arrests with Novolny calling for more civil disobedience…brave indeed…but necessary in these times…
Russian never counted on the US to use the financial nuclear weapon of cutting off their Central bank from their reserves. Did someone convince the Putin that US would never do that or did he and his team just not understand the plumbing of the global reserves ? That was an obvious gaping hole in his broad plans, thinking he had his bases covered.
Putin has lost completely in all spheres. There is no way to sugar coat it. This is huge win for democracies, Europe and the west and a huge knock against autocrats.
What next ? I worry he feels US/Europe/West has gone too far and crossed the his mental red lines. I doubt he goes quietly and retire or does he get taken out ?
Does he just stay in power weakened ? That I am sure he wont do….and he knows a perceived weak leader with absolute power is an oxymoron.
This isnt over just yet, you know where this is all know where this is possibly heading….how can we be sure its not heading that way, how can be sure he can be stopped in his tracks, has he gerry mandered is path to the button where the checks and balances are gone. I will not feel comfort now until he is gone ….one way or another. I hope our intelligence community have started back channel contacts to make sure we all survive.
China might feel pressured to clearinghouse Putin lest he declared it an act of war by NATO.
Time for China to fess up to what kind of world they wanna see.