After what was quite a weekend we find that the economic pace has if anything picked up this morning so let us start with something which is quite extraordinary even for these times.
The Bank of Russia Board of Directors decided to increase the key rate to 20% per annum from 28 February 2022. External conditions for the Russian economy have drastically changed. The increase of the key rate will ensure a rise in deposit rates to levels needed to compensate for the increased depreciation and inflation risks. This is needed to support financial and price stability and protect the savings of citizens from depreciation.
I think that is the largest increase I have ever looked at because as the former rate was 9.5% it is an increase of 10.5%. When the UK was ejected from the ERM back in 1992 we did announce two interest-rate increases totaling 5% but the second one never happened so it was only 2%. As you can see depreciation gets a couple of mentions so let us now switch to the Rouble.
Feb 28 (Reuters) – Russia’s rouble plummeted against the dollar on Monday, leading losses among developing world currencies after a clutch of Western nations imposed biting new sanctions on Russia for its invasion of Ukraine.
The rouble slid nearly 30% to hit a record low against the dollar, slammed by the sanctions including restrictions on key Russian banks to use global payments network SWIFT.
It quickly went to 106 versus the US Dollar replacing the 83 at which it has closed for the weekend. Indeed as Max Seddon of the Financial Times points out if you wish to change your money in Moscow it makes UK airports look amateurs.
My Russian bank is offering dollars at the rate of 166 rubles. The 120 ruble rate they had last night, or 130 ruble rate they had 45 minutes ago, was a steal by comparison
Foreign Exchange Reserves
There has been a lot of talk about restricting Russian access to the SWIFT messaging system for international payments. But the big change has been this.
The UK Government will immediately take all necessary steps to bring into effect restrictions to prohibit any UK natural or legal persons from undertaking financial transactions involving the CBR, the Russian National Wealth Fund, and the Ministry of Finance of the Russian Federation.
This is the UK version but many other countries are doing the same and it is the Bank of Russia where this creates an issue. This is because whilst it has enormous foreign exchange reserves of the order of 630 billion Dollars before this crisis a fair bit of it is held abroad. So the prospect of Russia not being able to access its reserves is in play.
Securities make up a little more than half ($311bn) of what the CBR had at its disposal. According to its annual report, these assets were mostly highly rated, with just 6.8 per cent of them holding less than an A rating. ( FT Alphaville)
In ordinary times these would be easy to sell and the Bank of Russia would have ammunition. But there is a catch.
Foreign exchange reserves are not held by central banks. Securities and money never move, everything is external . .
So with the restrictions extending to the central bank it cannot get its hands on the money from the securities and it gets worse.
The second chunk of reserves the CBR holds are in the form of currency and deposits. These are worth $152bn. Of this $152bn, about two-thirds is held in official institutions. That includes other central banks, the Bank for International Settlements and the IMF. Central banks in the Eurosystem, where about a quarter of the CBR’s assets are held, have already frozen the central bank’s accounts. The European Central Bank has said it will implement all sanctions decided by the EU and European governments.
So the majority of the foreign exchange reserves are not usable today leaving Russia with pretty much only its gold to sell. Now it has a lot of it and of course the price is presently high ( around US $1900 as I type this) but in a rather bizarre move they announced the opposite of what you might expect.
From February 28, 2022, the Bank of Russia resumes the purchase of gold on the domestic precious metals market.
The purchase price of gold will be determined daily based on the morning price of the London Bullion Market Association (LBMA Gold Price AM).
If they actually carry through with this then they will be selling Roubles to do so. Best of luck to whoever has to explain that to President Putin.
Actually I am pretty sure the policy has changed as the Rouble has rallied to 98 versus the US Dollar in a move that has all the hallmarks of central bank action,
Financial Markets
Here there has been more bedlam as we see the prospect of a bank run highlighted by news like this.
The European Central Bank (ECB) has assessed that Sberbank Europe AG and its two subsidiaries in the banking union, Sberbank d.d. in Croatia and Sberbank banka d.d. in Slovenia, are failing or likely to fail owing to a deterioration of their liquidity situation.
The Austrian parent bank Sberbank Europe AG is fully owned by Public Joint-Stock Company Sberbank of Russia, whose majority shareholder is the Russian Federation (50% plus one voting share).
Such fears have led to the pictures of Russians queuing up at bank ATMs yesterday and today. There is an irony in that as Ukrainians have been doing the same.
Such fears will be heightened by this.
The Bank of Russia will also introduce a temporary ban on brokers from executing transactions to sell securities on behalf of non-residents from February 28, 2022.
Which later morphed into this.
Due to the current situation, we have decided not to open a stock market section, a derivatives market section, or a special derivatives market section on the Moscow Exchange today.
As to the bond market there is this.
Russia’s biggest foreign bond, a $7bn bond maturing in 2047, halved in price to 35 cents on the dollar, according to Tradeweb data. Investors said the market was extremely hard to trade. “If you see a quote on the screen it might be live or it might not,” said one. “There’s nothing certain in this environment. It’s not about fundamentals any more, it’s about compliance issues.” ( Financial Times)
I see someone posting that a Russian transport bond is being quoted at 66 to 114 so basically no-one will trade unless it is a margin call.
Comment
There is a lot happening here as the chaos of war transfers itself to the financial markets of Russia. We will see both inflation as a result of the currency decline adding to the existing issues and deflation for much of the economy as the ordinary Russian has to cut back to buy essentials. Except for the arms manufacturers who are presumably working flat-out.
JPMorgan: Expects Russian Economy To Contract 20% (Q/Q)In Second Quarter, By Around 3.5% For Full Year ( @LiveSquawk )
With the higher oil price we will also be facing more inflation as well and I note the ECB is using this as a good day to deflect from its own actions.
#ECB’S CENTENO CAN’T RULE OUT STAGFLATION AFTER RUSSIAN ATTACK – BBG *ECB’S CENTENO: WAR WILL DELAY SECOND-ROUND EFFECTS IN EUROZONE ( @C_Barraud )
The next issue is that if you restrict access to something then in future people will rely on it less. So we may see some central banks start to take assets home, or rather the ownership of them.
Also a deeper problem for Russia is that those who got their money out have avoided the collapse which will only encourage future capital flight.
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