Russian central bank sidelined: attack on Russia's treasury

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Central Bank of Russia in Moscow: The central bank will be disarmed

Photo:

Yuri Kochetkov / dpa

The Russian ruble fell by 20 percent at the beginning of the week, the central bank in Moscow more than doubled its key interest rate from 9.5 percent to 20 percent, the Russian stock exchange remains completely closed for the time being and ATMs across the country are forming for a long time queues.

Many Russians seem to prefer knowing that their savings are in their own pockets rather than in a financial system that is becoming more and more isolated from the outside world and is probably on the verge of collapse.

There is no doubt that the sanctions that the western world imposed on Russia and its economy last weekend are already having an effect.

One measure in particular by the West may have surprised even Russia's President

: the announcement that the Russian central bank would be kept away from the country's foreign exchange reserves and thus deprived it of the opportunity to support the national currency, the ruble.

A few days after the start of the Russian invasion of Ukraine, the USA, the EU and other countries are advancing against Putin's most important economic bastion: the country's treasury.

Russia's central bank has amassed around $630 billion in foreign exchange and gold reserves over the years.

A huge fortune that Putin would urgently need in the coming months of increasing economic isolation, for example to slow down the devaluation of the Russian currency and to keep possible imports affordable.

Or to support the many commercial banks in Russia, which have themselves been hit by Western sanctions, and to provide domestic companies with liquidity.

The central bank will be disarmed

But nothing should come of it, as the United States, France, Canada, Italy, Great Britain, the EU Commission and Germany jointly decided at the weekend.

The assets of the Russian central bank will be blocked, said EU Commission President

.

"Your transactions will be frozen. And we're taking away the central bank's ability to use their funds internationally."

It is an intervention that is unprecedented in history.

Similar sanctions have already been imposed on the central banks of countries such as Iran and Venezuela.

So far, however, no such action has been taken against the central bank of a G20 country.

Russia is becoming an economic and financial outcast in the global economy, a US government official commented.

The Russian central bank will be practically "disarmed".

This is possible because Russia keeps only a small part of its gold and foreign exchange reserves in its own country.

This is shown by an overview from the annual report of the Russian central bank: According to this, Russia only keeps its enormous gold treasure in its own vaults.

The country has accumulated gold holdings of around 2,300 tons over the years, making it the fifth largest gold owner in the world, according to the World Gold Council.

In total, this gold is worth about $132 billion.

In addition, Russia has foreign exchange reserves of 460-470 billion dollars, divided into US dollars, euros, Chinese yuan and other currencies.

These reserves are in the form of securities and other holdings at various financial institutions around the world, the largest part of which, around 14 percent, is in China.

An editor of the "Financial Times" found an overview of the distribution of the 630 billion reserves in gold, securities and other stocks on the website of the Russian central bank and spread it via Twitter.

Because the original overview can no longer be found, here is an excerpt from the tweet:

What can be seen is that with a volume of 311 billion dollars, around half of Russia's foreign exchange reserves are in securities such as government bonds from various countries.

In addition, there are bank holdings totaling approximately $152 billion, split roughly 2/3 to 1/3 between central banks and commercial banks.

Putin's problem now is: In normal times, Russia's central bank could be headed by

(58) have no problem accessing this wealth at the top.

For example, if the ruble came under pressure, the Russians would – to put it simply – call their broker in Frankfurt or London and sell British or German government bonds.

With the British pounds or euros thus redeemed, the central bank from Moscow could then order ruble purchases and thus support the exchange rate of the national currency.

One of the advantages of the financial market is that such interventions are often not necessary if the foreign exchange hoard is large enough - the deterrent effect is sufficient: Because everyone knows about the almost unlimited resources of the Russian central bank, there is hardly any for investors Incentive to speculate against the currency.

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Interest rates more than doubled:

Russia's central bank governor

is a former adviser to Putin

Photo: via www.imago-images.de / imago images/SNA

However, this scenario applies only to peacetime.

Since Russia's attack on Ukraine and the decisions taken by the West last weekend, new rules have come into force on the financial market.

Russia is unlikely to find any partners to carry out the transactions in question in the future.

Central banks, private banks, brokers and other financial companies - hardly anyone in the western world is likely to ignore the sanctions and allow Russia to do the foreign exchange transactions in question.

Support for Moscow from countries like China, which are not participating in the sanctions against Putin's actions, is conceivable.

However, experts consider it unlikely, because actors who help Russia would have to expect sanctions on their part.

In short: Russia is sitting on a huge treasury that could help cushion the effects of the economic sanctions against the country.

Central bank boss Nabiullina, who was previously the country's economics minister and a close adviser to Putin, hardly has access to these billions of dollars anymore.

The 2,300 tons of gold owned by the central bank are probably only worth less under the new conditions.

Undoubtedly, theoretically, they can be monetized.

However, that will probably involve increased effort – and probably also with price reductions that correspond to the circumstances.

Many experts believe that the effects of the sanctions that have now been adopted, including the crackdown on the central bank, will have a devastating impact on the Russian economy.

So it's no wonder that developments in Moscow have already triggered activity.

"The economic reality has changed significantly," Presidential

admitted to reporters on Monday.

"These are heavy sanctions, they are problematic. But Russia has the potential to compensate for the damage."

Russia has long had plans in the drawer to be able to respond to all possible sanctions.

At a crisis meeting, President Putin wants to

discuss the economic situation with central bank chief Nabiullina, Finance Minister

and the CEO of the major bank Sberbank,

The central bank did not stop at raising the key interest rate drastically to 20 percent.

For example, together with the Ministry of Finance, she instructed Russian companies to sell 80 percent of their foreign exchange earnings.

The central bank also signaled its willingness to raise interest rates even further.

However, there is a catch: Higher interest rates can help stabilize the ruble exchange rate and curb inflation.

But they also make loans more expensive – for investments, for example.

In this way, the central bank would not only help the Russian economy with its actions - it would also burden it in turn.