Weaponized finance… Over the weekend, Western countries piled unprecedented financial sanctions on Russia. The goal: disrupt Russia’s ability to finance its war in Ukraine by cutting it off from critical financial resources. The fallout in Russia: plunging stocks, a crashing currency, and panic.
- Sinking stocks: Russia closed its stock market yesterday and today to prevent a crash after it plummeted 30%.
- Sinking currency: The ruble lost more than 30% of its value against the US dollar, trading as low as 119 rubles per $1.
- Soaring interest: To prop up its currency, Russia’s central bank (think: its Fed) more than doubled its key interest rate, to a record 20%.
- Run on banks: Russians lined up at banks and ATMs to withdraw cash, rushing to spend or convert their savings before they lost even more value.
Uncharted territory… The West’s latest sanctions have made it hard for Russia to (a) tap it into its rainy-day fund of foreign currency (think: USDs, euros) and (b) stabilize the plunging ruble. Two financial strikes explain why:
- Strike #1: Western countries kicked some Russian banks out of Swift, the key global banking network for international transactions. That severely limits Russian banks’ ability to trade and convert rubles into other currencies, which is necessary to pay for imports.
- Strike #2: The US froze the Russian central bank’s access to its foreign currency held at American banks — read: a large chunk of Russia’s $640B reserves. Normally, Russia’s central bank would buy rubles to stabilize the currency from falling. Problem: it needs foreign currency to do that.
“Fortress Russia” is showing cracks… Moscow has spent years trying to “sanction-proof” its economy by bulking up on foreign currency (among other things). But these sanctions block Russia from a big part of the global economy, and the damage is already showing. Still: the sanctions let the West keep buying oil and gas from Russia — aka: Russia’s biggest source of revenue.