Ukraine war: When the ruble stops rolling - Putin's war chest drastically loses value

Created: 03/01/2022, 09:55

An exterior view of the Central Bank of Russia building in Moscow: Russia can no longer access a large part of its reserves at the central bank.

© Yuri Kochetkov/EPA/dpa/archive image

The West has reacted harshly to Putin's war against Ukraine.

Russia can no longer access a large part of its reserves.

Frankfurt/Moscow - queues at the ATMs, the ruble in free fall - the harsh financial measures of the West against Russia in the Ukraine war * are having an effect.

What is likely to hit Moscow particularly hard is that not only large Russian commercial banks are being cut off from the global Swift network and thus from rapid data synchronization for cross-border payments.

The Russian central bank can de facto no longer trade on Western financial markets.

The Moscow Central Bank can no longer access the assets it has stashed away in the European Union, Great Britain, the USA and Canada.

Bundesbank President Joachim Nagel said on Sunday on ARD: "These are the strongest measures that I know of that have ever been taken internationally, and they will not fail to have an effect."

Ukraine sanctions: how big are the foreign exchange reserves of the central bank of Russia?

According to its own statements*, the Russian central bank has reserves with a total value of around 630 billion dollars (as of mid-February): US dollars, euros, Chinese yuan, government bonds, gold.

Theoretically, Moscow could use it to pay for its imports for more than twelve months, calculated Commerzbank chief economist Jörg Krämer.

However, this treasure is largely stored at western central banks and commercial banks.

According to the latest statistics, the Moscow Central Bank holds securities abroad with a volume of a good 311 billion dollars.

In addition, there are around $152 billion in cash or deposits with other central banks or banks outside Russia.

Ukraine sanctions: Why are foreign exchange reserves important at all?

Foreign exchange reserves are of great importance for the ability of a central bank to conduct monetary and exchange rate policy.

“Traditionally, most of the foreign exchange reserves are tied up in government bonds.

Above all, US bonds and federal bonds are in demand because you can always find a buyer on the market if you want to turn them into money,” explains Christian Apelt, foreign exchange expert at Landesbank Helaba.

"In normal times, for example, the central bank of Russia would sell dollar bonds on the market and buy back rubles with the proceeds to support its own currency." With the West's decision, some of the assets that represent the value of the ruble are in question asked, says currency expert Ulrich Leuchtmann from Commerzbank.

What sanctions have been taken against the Russian central bank?

The USA, Canada, Great Britain and the EU have banned the central bank from using the part of the foreign exchange reserves stored in their countries.

Experts estimate that 40 to 55 percent of the total reserves are affected.

"Because of the sanctions, Russia* would have to try in a roundabout way to turn its foreign exchange treasure into money, because the relevant stock exchanges are now closed to the Russians," said Helaba-Exerte Apelt.

Why is the Russian central bank sanctioned in the Ukraine war?

The EU Commission states that this is intended to prevent other punitive measures from being circumvented.

Bank analysts also see this as an addition to the sanctions against large Russian commercial banks.

Their connection to the international bank information system Swift is to be cut.

"So the Russian banks no longer receive deposits, unless the deposits come through their own Russian or another payment system," explained DIW researcher Dorothea Schäfer.

“Customers outside of their own Russian payment system will want to quickly withdraw funds from accounts with Russian banks, or have already withdrawn them.

Banks face insolvency due to bank run.

That has already happened to Sberbank’s EU subsidiaries.”

Ukraine sanctions: how did bank customers in Russia react?

In Moscow, St. Petersburg and other cities, some of the money was no longer available from ATMs, and banks on the sanctions list no longer paid out anything.

Shop assistants also reported mass problems when customers wanted to pay with credit cards from the listed Russian banks.

Long queues formed at many bank branches, sometimes several hundred meters long, because people wanted to withdraw their money.

Many Russians have to pay the rent at the end of the month, which is often handed out in cash so that landlords can smuggle the sums past the tax authorities.

Ukraine sanctions: Are Russian banks now threatened with bankruptcy?

The European Central Bank (ECB) warned of a possible bankruptcy of Sberbank Europe AG, headquartered in Vienna, and its subsidiaries in Croatia and Slovenia.

The institutes are threatened with running out of money because customers are withdrawing money on a large scale.

How is Russia reacting to the situation?

The central bank in Moscow has been asserting for days that Russia is prepared for all political scenarios, that it can refill ATMs and that deposits are also secured.

In the afternoon, the head of the Russian central bank, Elwira Nabiullina, announced steps to stop the withdrawal of capital: those who do not have permanent residence in Russia should only be allowed to export funds to a limited extent. 

The Kremlin tried to calm the situation: "So far there has never been any reason to doubt the effectiveness and reliability of our central bank," said Kremlin spokesman Dmitry Peskov.

Russia has been preparing for "possible scenarios" for a long time - including the most severe sanctions the country is now facing.

How does the overall package of sanctions work in the Ukraine conflict?

The partial freeze on foreign exchange reserves is perhaps an even more drastic step than the Swift ban on commercial banks, according to Neil Shearing, chief economist at Capital Economics.

Ulrich Stephan, Postbank's chief investment strategist, explains: "The aim is to avoid that central bank reserves can be used to pay for third parties or to stabilize the Russian ruble." The Russian ruble fell sharply on Monday, falling against the US dollars to a record low.

A dollar, in turn, cost around 100 rubles, down from around 84 rubles on Friday.

As a senior White House official put it Monday: “Putin's war chest of reserves worth $630 billion only matters if he can use them to defend his currency, particularly those reserves in exchange for rubles for sale.” And this is now no longer possible.

Ukraine sanctions: How is the Russian central bank reacting?

The central bank took several steps on Monday.

In particular, it raised its key interest rate drastically by 10.5 percentage points to 20 percent.

The currency watchdogs said the higher interest rates are intended to counteract the risk of the ruble depreciating and the risk of inflation.

However, higher interest rates are also having a negative impact on economic development, which is likely to suffer greatly as a result of the economic sanctions imposed by the West*.

The Russian Ministry of Finance also introduced an obligation for companies to sell part of their proceeds in foreign currency.

The measure should also aim to limit the fall of the ruble.

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