Russian economic collapse will be hard to avoid

People stand in line to use an ATM money machine in Saint Petersburg, Russia February 27, 2022.

LONDON, Feb 28 (Reuters Breakingviews) – Fortress Russia is crumbling. The central bank more than doubled its main policy interest rate to 20% on Monday to support the plunging rouble. It won’t be enough given Moscow has a dearth of palatable policy options.

The rouble fell as much as 23% against the dollar at the first chance traders had to react to some Russian banks’ imminent ejection from the SWIFT payments system as well as restrictions on central bank reserves. Those Western sanctions shattered the impression that Moscow had large enough economic buffers to withstand whatever America and its Western allies might throw its way.

Those defences had been built up since 2014, when President Vladimir Putin annexed Crimea. Russia runs a budget surplus and has total external debt of only around $478 billion, or about a third of GDP. It had amassed more than $630 billion in central bank reserves read more and around $174 billion in the National Wealth Fund that grows when energy prices rise. Lenders like Sberbank (SBER.MM) were well capitalised and not reliant on foreign funding.

All that went out the window over the weekend. Sanctions make it less certain that large revenues from energy exports will keep rolling in. The central bank’s massive rate rise was of temporary help but won’t be enough to stop Russians from trying to convert their savings into foreign exchange or withdraw money out of banks altogether. That’s why Sberbank’s global depository receipt lost more than two-thirds of its value in London trading, even as the Moscow market was shut. The European Central Bank, meanwhile, said Sberbank’s subsidiaries in Austria, Croatia and Slovenia were likely to fail.

Central bank boss Elvira Nabiullina said Russia’s internal payments system can connect to international alternatives to SWIFT. Maybe, but that won’t make overseas counterparties any less rouble-averse. She could hike rates a lot higher, but that would hurt a damaged economy. Ramping up capital controls is another option. She has already ordered any attempt by foreigners to sell Russian securities to be rejected. But banning rouble sales outright would paralyse importers. The central bank sold $1 billion propping up the rouble on Thursday but will find it harder to keep going following fresh sanctions which also hit the wealth fund.

Nabiullina’s best efforts won’t prevent the rouble’s collapse from reverberating throughout the economy. For all her past policy successes, it’s not in her power to prevent an economic collapse.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

CONTEXT NEWS

– Russia’s central bank on Feb. 28 raised its key policy interest rate to 20% from 9.5% as it tried to contain the fallout of Western sanctions imposed in retaliation against Moscow’s invasion of Ukraine.

– The U.S. Treasury on Feb. 28 blocked Americans from engaging in any transactions involving Russia’s central bank, National Wealth Fund and finance ministry.

– The Russian central bank also ordered companies to sell 80% of their foreign currency revenue, increased the range of securities that can be used as collateral to get loans and temporarily banned Russian brokers from selling securities held by foreigners. It did not specify to which securities the ban applied.

– On Feb. 27, the central bank said it would resume buying gold on the domestic market, launch a repurchase auction with no limits and ease restrictions on banks’ open foreign currency positions.

– The rouble weakened to 109 against the dollar in early trading on Feb. 28 from 84 late on Friday. It was trading at 98 at 1332 GMT.

– Russia’s stock market was closed but London-traded depositary receipts in Russia’s biggest lender, state-owned Sberbank, fell 69%.

Editing by Swaha Pattanaik, Karen Kwok and Oliver Taslic