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Russia's economy in crisis as sanctions bite

Arthur Sullivan
February 28, 2022

The war in Ukraine has prompted huge financial sanctions against Russia. The escalating list of measures is starting to severely impact the country's economy. The stock exchange is closed and people are queueing at ATMs.

People lining up at an ATM machine
Lots of ordinary Russians have flocked to banks and ATMs as Putin's war against Ukraine continuesImage: Dmitri Lovetsky/AP/picture alliance

Russia's escalating war in Ukraine has prompted unprecedented economic sanctions against the country.

Over the weekend, Russian banks were further cut off from the international financial system. Some have been excluded from the SWIFT payments system while moves have been made to stop the Russian central bank using its $630 billion (€562 billion) of foreign reserves.

The sanctions are by far the most severe to have been leveled at Russia since the country invaded Ukraine last week. The country's increasing financial and political isolation is already causing significant consequences for the economy, the 11th-largest in the world by GDP.

A plunging ruble

Russia's currency, the ruble, fell by around 30% to record lows after the latest sanctions, although it did recover slightly in recent hours. That compounds massive losses already experienced last week. In response, the Russian central bank has made an emergency decision to hike interest rates from 9.5% to 20%. The bank has also temporarily blocked the sale of securities held by foreigners.

The currency collapse has led to long lines outside ATMs across Russia, with fears rising over further plunges in the value of the ruble. The below tweet shows a video of a line outside ATMs in Moscow at 5 a.m. 

On Monday, the central bank announced that the Moscow Stock Exchange would not open. It also said in a statement that it has increased interest rates to support "financial and price stability and protect the savings of citizens from depreciation."

Central bank thwarted by reserves freeze

On Saturday, the European Commission, the US, the UK and Canada said they would move to prevent Russia using its massive foreign reserves, estimated to be worth around $630 billion as of the end of January.

The assets are denominated in dollars, euros, sterling and yuan and the benefit of holding such reserves is that, in theory, they would allow the central bank to intervene significantly to shore up the ruble in the event of volatility.

However, if Russia struggles to buy rubles with its foreign reserves, pressure on the currency will intensify and long lines at ATMs could evolve into more panicked runs on banks. The exact details of how the central bank will be blocked are yet to be revealed.

Russia still has some options to play with. Around 15% of its foreign reserves are held in China, and the Chinese government may be willing to help. Russia also holds one of the largest stockpiles of gold in the world, around 2,300 tons — worth around $142 billion at current prices.

However, Sergei Guriev, an economist with Sciences Po university in Paris, told the Financial Times that such options were fraught with uncertainty as well.

"Whoever says it will be easy to sell gold or yuans must be kidding. Chinese state banks are already blocking financing of Russian oil sales. China is afraid and rightly so of secondary sanctions. This is really a game changer," he told the newspaper.

International ratings agencies have already moved to downgrade Russia. S&P has lowered Russia's credit rating to "junk" while Moody's has put it on review for a downgrade to junk status.

SWIFT logo
The Russian banks to be excluded from SWIFT have not been namedImage: Dado Ruvic/Illustration/REUTERS

SWIFT action increases pressure

Following an array of measures aimed at Russia's biggest banks last week, the US, the EU and other Western allies said over the weekend they would cut out some of the country's banks from the SWIFT global payments system.

A joint statement from the countries' leaders said Russian banks would be ejected from SWIFT, but they were not named. However, banks which process payments for Russian energy exports — for example, Gazprombank — may be left alone, as they were in earlier sanctions rounds.

"The devil will be in the details," Edward Fishman, an expert on economic sanctions at the Eurasia Center of the Atlantic Council said on Twitter. "Let's see which banks they select." He said it would be an "absolutely huge deal" if the SWIFT measures included Gazprombank and the country's two big state lenders, Sberbank and VTB. Both the latter banks were already hit with strict sanctions last week.

The impact for ordinary Russians could be severe, according to Sergey Aleksashenko, a former deputy chairman of the Russian central bank now resident in the US.

Sanctions will hurt European economies too – DW's Christine Mhundwa

"This is the end of a significant part of the economy," Aleksashenko told Reuters. "Half the consumer market is going to disappear. These goods will disappear if payments can't be made for them."

However, until it is clear which banks will be hit, it is difficult to make a meaningful assessment of the impact. Russia has built its own alternative to SWIFT, known as SPFS. It already accounts for around 20% of domestic Russian transactions, but it has struggled to attract overseas banks.

Investors divest themselves of Russian interests

As fears over Russia's financial situation mount, several international companies and investors have pulled back on their interests in the country.

On Sunday, the Norwegian government said that its $1.3-trillion oil fund, the world's biggest sovereign wealth fund, would sell off its $3 billion worth of Russian investments.

BP has also moved to cut its ties with Russian oil company Rosneft, divesting itself of a 20% stake in the company. Shell will also end all its links with Gazprom.

Elsewhere, European football's governing body, UEFA, has ended its decadelong sponsorship deal with Gazprom, worth around €40 million ($44 million) a year to the football authorities.

Edited by: Hardy Graupner