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Financial Pressure in Russia – Ruble Crash

Financial tension in Russia: The ruble fell by almost 30% on Monday, and now’s 117 rubles are needed to buy it for $1. Russia’s central bank took several emergency measures to stop the chaos, the work of banks, the angry hunt for dollars, and strengthen the ruble’s value. These measures include some capital controls, the promise of unlimited ruble liquidity to banks, and a parent increase in all rates: up to 1,050 basis points, up to 20%. Who managed to mitigate the ruble collapsed on Monday.

It is worth noting that the collapse of the ruble and the financial crisis in Russia are commonplace: the financial crisis of Russia in 1998, Russia’s participation in the global financial crisis, the crisis of 2014, and now the crisis of 2022. During these 25 years, the ruble dropped by 97% against the US dollar.

The last two Russian financial crises triggered by sanctions imposed on Russia following its invasion of Ukraine. But the sanctions imposed so far are much more rigid and more deeply targeted at Russia’s financial system than previous sanctions. The consequences for the Russian financial system will also be more severe.

Consequently, the Central Bank of Russia also reacted more. Back in 2014-2015, the policy rate increased to 15% due to multiple rate growth. The central bank rose its policy rate eight times by 525 basis points to 9.5%. To combat strong inflation. On Monday, the bank raised its policy rate to 20% by another 1,050 basis points.

Russia and Ruble Crisis

The ruble’s collapse is that long-term ruble-denominated debt is toxic, there are few recipients, and incomes are very high, which is why Russia can not take many loans in rubles. Consequently, those who now hold ruble debt suffered a significant loss in terms of the purchasing power of these bonds. Bond trading in Russia is suspended for the time being.

It is worth noting that Russia lends in foreign currency, part of them directly to sovereign debt and part of it through its giant state-owned enterprises; Which are significant exporters of natural gas, crude oil, metals, other commodities, and military equipment. Regarding foreign currency debt issued by the government, the cost of default insurance rose to a level that indicates a 56% chance of default. During the 1998 Russian financial crisis, the government ended its foreign currency debts.

Russian banks in Russia, which have serious problems, will be strained by the central bank. Private shareholders can be destroyed and replaced by the state. On Monday, the government closed the stock market in Russia, and the shares were not traded.

Conclusion

The Russian financial crisis has had a negligible impact on the US economy and financial markets. Russia imports large quantities of consumer goods. The ruble collapse provides a massive increase in consumer price inflation for people who earn a living in rubles.

However, a significant slowdown in Russian natural gas, crude oil, metals, and other goods could further push commodity prices. This may further increase inflationary pressures in other countries; Mostly in Europe, where a large part of Russia’s energy exports goes. American crude oil WTI now sells for about $95 a barrel. Brent oil is already over $101 a barrel.

Emerging market stocks and bond funds can prove dangerous, depending on their exposure to Russian stocks and bonds. There are reports that the European EM Fund closed, and others may follow. Investors will not withdraw their money until clarity about what Russian assets are traded on. Trading in Russian stocks and bonds suspended in Russia. The S&P 500 index lost only a tiny spot on Monday, dropping some gains on Friday.



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