October 3, 2022

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The ruble is ‘devastated’ as Russia slides into default

The ruble is 'devastated' as Russia slides into default
Until the global financial crisis of 2008, Russian President Vladimir Putin His aides had promoted the ruble as a possible alternative to the US dollar, arguing that it should be an integral part of the global financial system. They claimed that Russia would become one of the five largest economies in the world.

Putin’s quest for dominance over his neighbors, beginning with his attack on Georgia in 2008, and continuing with the annexation of Crimea in 2014 and the invasion of Ukraine last month, tore what remained of the authoritarian leader’s economic dreams.

In early 2008, one dollar will buy almost 25 rubles. The value of the Russian currency has fallen dramatically since then, and Western sanctions imposed in response to the invasion of Ukraine brought its downfall. And on Wednesday, one US dollar could buy 117 rubles in Moscow after the currency fell 10% and hit a new record. The ruble was weaker in the foreign market this week.

The latest decline came after the Russian Central Bank banned Russians from buying hard currency and ordered banks to limit withdrawals from foreign currency accounts at $10,000 for the next six months, steps that could help preserve some of the country’s dollar reserves and bolster the ruble.

Sergei Aleksachenko, a former Russian finance ministry official and central bank official, called the strategy “unbelievable folly” that could lead to a bank run.

“It is clear that the outflow of foreign currency deposits from Russian banks has exceeded the expectations of the Bank of Russia and calls into question the ability of the banks to meet their obligations,” he said. Wrote in a newsletter.

“The biggest mistake that the monetary authority in Russia can make is to touch private savings – if there are no bank inflows yet, it will,” Alexashenko added.

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Russia has been scrambling to prevent a financial meltdown since the United States, the European Union and other Western allies imposed sanctions on much of the country’s banking system, including freezing hundreds of billions of dollars in reserves that Moscow had been hoarding for years to protect the economy. Analysts estimate that more than half of Russia’s foreign exchange and gold reserves are now off-limits.

The central bank more than doubled interest rates to 20%, and temporarily banned Russian brokers from selling securities held by foreigners. The government ordered exporters to exchange 80% of their foreign exchange earnings in rubles, and prohibited Russian residents from making bank transfers outside Russia.

The ruble has come under severe pressure, and Moscow’s failure to defend the currency will translate into economic pain. Russia is a major exporter of oil and gas, but many other sectors of its economy depend on imports. And with the depreciation of the ruble, the cost of its purchase will become much higher, which will lead to higher inflation.

Credit rating agency Fitch downgraded Russia’s credit rating on Tuesday and warned that a default was “imminent”.

The rating agency said in a statement that “further tightening of sanctions, and proposals that might limit energy trade, increase the likelihood of a political response by Russia that includes at least a selective non-payment of its sovereign debt obligations.”

Even as Russia nears default, Western countries continue to impose punitive restrictions aimed at further isolating Moscow. The US and UK banned Russian energy imports on Tuesday, and the EU said it would Trying to reduce imports of natural gas By 66% this year.

For Moscow, the costs are increasing. The central bank’s decision to prevent Russians from buying US dollars marks the end of the ruble, according to Anders Oslund, an economist and former adviser to the Russian government.

“All the convertibility of the ruble is gone. Putin has destroyed the ruble,” Oslund said. Twitter.

– Mark Thompson contributed reporting.