Central Bank Squeeze Lacks Energy to Cripple Russia’s Economy
While blocking Russia’s official currency reserves puts the ruble and the economy under heavy pressure, they are still underpinned by commodity exports
By Jon Sindreu
The Russian ruble fell sharply on Monday. / PHOTO: ANDREY RUDAKOV/BLOOMBERG NEWSIt is hard to conceive a complete collapse of Russia’s economy as long as it can keep selling its oil at almost $100 a barrel.
Over the weekend, the U.S., the European Union, the U.K. and Canada made the unprecedented announcement that they would stop the Russian central bank from using its foreign-currency reserves, diminishing the country’s ability to protect the ruble, which plummeted Monday.
They are also seeking to cut off some Russian banks from the ubiquitous Swift messaging system.
Ever since invading Crimea in 2014, Moscow has sought to reduce its foreign dependency.
Imports have been partly replaced by domestic products, the Russian central bank has beefed up its reserve pot, linkages with foreign banks have been reduced and a Russian alternative to Swift has been developed.
The blow remains painful: Of the $630 billion held in reserve by the central bank, more than half is probably blocked.
Gold held domestically made up less than a quarter of the pot in mid-2021, and it won’t be easy to sell quickly.
Most reserves were liquid foreign deposits and securities, but less than 15% were in China.
Almost all the rest is invested in Western markets.
Yet Russia already suffered a serious recession in 2015, and the Russian central bank managed to avoid a currency-led inflationary spiral by aggressively raising interest rates.
It did the same Monday by pushing them to 20% from 9.5%.
Moreover, the post-2014 woes happened as the price of crude fell off a cliff.
This time, Brent futures are hovering around $100, boosting Russia’s current-account surplus, which is forecast to be around $20 billion a month.
As Sofya Donets at emerging markets-focused Renaissance Capital pointed out Monday, this is likely to grind closer to $30 billion when Russian economic growth wobbles and imports decrease.
This means a lot of dollars and euros coming in to pay for goods, services and debt interest.
And the central bank’s gold and yuan still pay for eight months worth of Russia’s estimated imports for 2022.
Investors shouldn’t fall for the trope that nations with current-account surpluses can’t suffer currency and financial crises.
They can, and Russian banks will experience both.
Swift exclusion will cause big disruptions, given persistent linkages with Western financial systems.
On Monday, the European Central Bank said the European arm of Sberbank, Russia’s biggest lender, is likely to fail because of a run on its deposits.
Still, Russian officials can provide infinite liquidity in rubles, and have other foreign-exchange tools.
On Monday, they mandated firms to convert 80% of their revenues from abroad into rubles, and stopped foreigners from selling domestic securities.
Nonresidents still held 20% of ruble-denominated sovereign debt in January, S&P Global Ratings data shows.
Admittedly, short-term gyrations say little about where the ruble is headed, but it was down about 15% against the U.S. dollar in the European afternoon, compared with more than 30% initially.
The bottom line is that the magnitude of Russia’s energy sector is so disproportionate—half of its exports and a fifth of the economy—that it probably puts a floor under how bad things can get for the ruble.
Over the long term, obstacles created by sanctions in its financial infrastructure will be bypassed, perhaps creating greater alignment with China.
Yes, the isolation of the Russian economy will continue to increase.
But as long as Western sanctions are designed to spare its sales of oil and gas, it may be one that Moscow is able to endure.
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