The ruble… Sanctions resulted in a meltdown in Russian financial markets, sending the ruble to all-time lows against the US dollar and crippling Russia’s access to finance as well as most of the central bank’s foreign currency reserves. Should the conflict escalate further or sanctions intensify, the ruble could constantly face new lows against the US dollar.
2014 similarities and differences… Government bonds fell as 10-year ruble yields came out, credit default swap spreads now meaning a significantly higher probability of government default. It is highly probable that the Russian economy will enter recession this year and may follow a similar course to the behavior in the 2014-2016 period when the sanctions related to the occupation of Crimea were imposed and oil prices fell. Variables that differ are that the sanctions are aimed directly at the collapse of the economy and oil prices are high. Increasing oil prices normally favors Russia, but as long as it can sell its oil.
As the central bank’s reserves are unavailable, CBR policy rates will remain at 20% for the next few quarters or may be increased further as the case may be.
Reserves of the Russian Central Bank… Source: Bloomberg, CBR
1998 Russian crisis… In the 1998 crisis, investors fled the market by selling the ruble and Russian assets (such as securities), which put downward pressure on the ruble. This forced the Central Bank to spend its foreign reserves defending Russia’s currency, further eroding investor confidence and undermining the ruble. It is estimated that the Central Bank spent about $27 billion of its US dollar reserves between October 1, 1997 and August 17, 1998 to protect the floating anchor.
The 2014 – 2017 crisis… The lack of confidence in the Russian economy in the said period was due to at least two main sources. The first is the fall in oil prices in 2014. The price of crude oil, which is an important export item of Russia, decreased by nearly 50% between the high level of the year between June 2014 and December 16, 2014. The second is the result of international economic sanctions. The sanctions imposed on Russia after Russia’s annexation of Crimea and the Donbas War led to a disintegration in the economy. While it was revealed that the total net foreign exchange intervention of the Russian Central Bank was 76 billion dollars for 2014 during this crisis period, a decrease in reserves close to 150 billion dollars is observed in the crisis period.
Conclusion? The ruble is at a very different point from its pre-crisis profile. The increase in oil prices due to the world supply deficit and high demand made Russia one of the most durable EMFX members. However, the reserves paralyzed by the sanctions are now weakening the ruble’s profile despite rising energy prices. Sanctions targeting CBR FX reserves and Russia’s sovereign wealth fund have eroded the country’s external buffers and foreign exchange reserve coverage is now inadequate. The impact of SWIFT-like steps is actually greater than meets the eye on paper, as sanctions make ruble-denominated assets non-convertible. Russia has a current account surplus of 5% of its GDP. If the situation in question hinders Russia’s ability to export oil and natural gas, it is certain that the current account surplus phenomenon, which makes Russia resilient against a possible crisis, will also erode.
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