The ruble teeters on its feet in a jaw blow that could prove an economic knockout: an alliance of the EU, the US, the UK and Canada this weekend closed Russian access to a large part of the $643 billion dollar (570 billion euros) to freeze President Putin’s filled war chest. With these international reserves, Putin seemed to have built a granite line of defense against sanctions: enough money, the equivalent of 17 months’ worth of Russian imports, to withstand the West’s squeeze on the Russian economy for a long time.
Due to this sanction, which also joined the neutral Switzerland beloved by wealthy Russians on Monday, Putin’s financial defense line is suddenly much less solid. A large part of Russia’s international reserves – government bonds, bank balances – consists of euros, pounds and dollars, and is located in the West. For example, about 22 percent are located in France and Germany. By freezing those and other reserves in the West, Russia loses access to about 40 percent of its own war coffers. That Western measure — an exceptional attack on the sovereignty of central banks, which normally enjoy immunity from political interference — comes on top of another sanction, the exclusion of some Russian banks from the international payment system Swift.
All this largely explains the nosedive that the ruble made on Monday. Last week, the Russian central bank managed to slow down the fall of its own currency by selling part of its international reserves and buying rubles instead. It was the first time since the annexation of Crimea in 2014 that the Russian central bank sold foreign exchange from its own reserves. For example, Russia managed to boost the ruble, which plunged towards 90 rubles per dollar immediately after the invasion of Ukraine, to 83 rubles per dollar.
Exceptional reprisal
That same trick is much more difficult for the Russian central bank to repeat today, now that it can no longer sell its western assets. An exceptional reprisal, which in the past has only been meted out to smaller economies such as Venezuela, Iran and North Korea. “It will turn out to be a myth that Russia has supposedly made its economy ‘sanction proof’,” a senior US government official announced on Sunday. “The ruble will collapse further, inflation will spike, and the Russian central bank will be defenseless.”
Putin did not see this sledgehammer coming, suspects Russian economist Vasily Astrov of the Wiener Institut für Internationale Wirtschaftsvergleiche. ‘Because if they did see it coming, why did they keep such a large part of their financial reserves in Europe? That makes yourself vulnerable.’
The Russian central bank is not completely defenseless: 14 percent of Russia’s international reserves, for example, are in the hands of China. Crucial is whether China will allow Russia to sell its yuan to keep its own ruble afloat. In a statement Monday morning, the Chinese Ministry of Foreign Affairs opposed Western sanctions. In addition, about a fifth of Russia’s international reserves consists of gold, which is entirely located in Russia. By offering some of that gold to the market at ram prices, the central bank can gain some breathing space.
Nevertheless, Astrov expects that yuan and gold will not help the Russian central bank out of the fire. ‘Who are they going to sell gold to? Venezuela already had to go to great lengths to sell some of its gold after the US sanctions, eventually Venezuela managed to close a gold deal with Turkish President Erdogan. But Russia has much more gold than Venezuela, it will not be easy to find buyers at reasonable prices now. And selling yuan is possible, although I doubt that many Chinese investors at the moment dare to burn their fingers on Russia.’
What does the Russian do with his rubles?
In an attempt to stop the ruble’s free fall, the Russian central bank doubled its key interest rate on Monday from 9.5 to 20 percent. There is also a temporary ban on Russian stockbrokers from selling shares and other securities owned by foreigners, and Russian exporters are now required to convert 80 percent of their foreign exchange earnings into rubles. The stock exchange in Moscow will remain closed all week due to the turmoil in the Russian financial markets.
With these measures, the Russian central bank managed to stabilize the ruble somewhat. Over the course of Monday afternoon, around 100 rubles went into one dollar.
Astrov suspects that the ruble has not yet bottomed out. ‘At the moment foreigners can no longer convert their rubles into dollars, but Russians themselves can for the time being. If they lose faith in the currency, it will be very difficult for the central bank to keep the ruble afloat. Moreover, we do not know what the coming days will bring: perhaps more Western sanctions will follow, or Russia will hit back with its own sanctions. Former President Medvedev has already called for the nationalization of foreign assets in Russia. So I’d be surprised if the ruble doesn’t fall even lower.’
‘I went to the bank armed with a hammer’
Jeroen Ketting (50), who lives in Moscow, is the owner of the Lighthouse Group, which supports Dutch companies that do business in Russia.
‘People are not so much panicked, but they are starting to get tense. Google Pay and Apple Pay sometimes work and sometimes they don’t. It’s like Russian roulette. You don’t know when you can or can’t pay. Anyone who can withdraw money has already done so. If you want to withdraw more than two thousand euros or dollars, you must request it now in advance. We have to wait for the money to arrive. You will receive a phone call when there is cash again and you can pick it up. Recently we went to collect a large amount. I had a hammer and screwdriver with me. If you go out with a lot of cash, you have to be able to defend yourself.
“We don’t know if we can be forced to convert our currency to rubles. That is a likely measure to support the ruble. With a devaluation of more than 30 percent per day, you can’t wait for that. Somehow I prepare myself mentally for that to happen. We have already paid the salaries and our suppliers a month in advance because we saw this coming. This situation may mean that we have to start over from scratch. We have to tighten the belt. We might even have to have holes made.’
‘My ABN Amro card no longer works here in Moscow’
Anton Isaev (37) has a Dutch and a Russian passport. He lives in Moscow, where he does an internship as a journalist at the online platform Russia Beyond.
‘My mother also lives here and wants to get her euros from the bank as soon as possible. If Russia is definitively cut off from the Swift payment system, she will no longer be able to access it. Her Dutch bank card no longer works. Neither does my own ABN Amro card. A few days ago, she was standing in line at an ATM. She could then withdraw euros from the wall for a commission of 1 percent. I was at two banks today to do the same, but the ATMs have run out of euros or dollars. You can withdraw rubles. Hopefully it will be topped up again tomorrow. There aren’t really any rows anymore.
‘On Sunday I wanted to buy a train ticket with my bank card. That didn’t work. The pass worked in the supermarket, but not in the restaurant where I was on Monday afternoon. Then you better have cash. Of course others think the same. I saw it a few days ago bank run also. I didn’t see it that way on Monday. In general, people might be a bit gloomier here. When I speak to people, they are mostly surprised that it has come this far. But I’m on the bus now and people look just as grumpy as ever.’