Qualified sometimes as an unexpected measure, of unprecedented severity, of the harshest blow, the sanction against the Central Bank of Russiaa first within the G20, aims to strike at the heart of the Russian economy.
The Russian currency plunged nearly 30% against the dollar ahead of Monday’s open session after the imposition of sanctions aimed at crippling Russia’s central bank. For its part, the Moscow Stock Exchange remained closed on the orders of a central bank fearing a collapse in prices.
From now on, any transaction with the Russian monetary institution is prohibited by the United States and its allies. The sanction aims to paralyze it, at least to restrict its ability to use its imposing foreign exchange reserve in the defense of the Russian currency. It quickly caused a rush of people to ATMs and exchange offices.
To mitigate the shock, the Central Bank immediately and sharply raised its key rate from 9.5% to 20%. And in order to avoid a haemorrhage of capital, Moscow prohibits residents from transferring foreign currency abroad. It requires exporters to convert into rubles 80% of their income earned in foreign currencies since 1is January, and to maintain an 80% ruble liquidity ratio going forward.
Initially, the financial sanctions were aimed at freezing the assets of the oligarchs and others close to the regime. According to Gabriel Zucman, professor at the University of California, quoted by Agence France-Presse, half of the wealth of the richest Russians is held abroad. Different estimates put the oligarchs’ losses from the sanctions at US$32 billion, which has sparked a cryptocurrency rush.
The sanctions then extended to financial institutions in the form of a suspension of the SWIFT interbank exchange platform targeted for Russian banks not party to energy contracts, in order to mitigate the shock on a European economy dependent on the Russian gas, not to provoke a crisis on the markets and not to fuel soaring prices.
This third major salvo targets the heart of the economy. “Inflation will soar, purchasing power will collapse, investments will collapse,” we summarize, which can only add to the internal pressure on Vladimir Putin.
Already on Friday, the analysis company Capital Economics estimated that the sanctions would remove this year from 1 to 2 points of GDP on a growth rate of 2.8% forecast in January by the International Monetary Fund. This was before the freezing of central bank assets and the extension of exclusions from the SWIFT network. In 2014, former Russian finance minister Alexei Kudrin argued that a complete exclusion of his country from SWIFT would likely lead to “a GDP contraction of up to 5% in the year following the imposition of the restriction “.
On inflation, Capital Economics mentioned an increase of around 3 points. It reached 8.7% in January.
Limited effect
It is undeniable that the impact of sanctions is increasingly felt. The Central Bank of Russia’s foreign exchange reserves exceeded US$640 billion last week according to official data, or just over 40% of Russian GDP, inflated by the explosion in gas and oil prices. While gold and the Chinese yuan (with a combined presence of 35%) have gained weight over the years, more than half of the prize pool remains denominated in euros, US dollars and pounds sterling, which cannot greatly weaken this intervention force in support of the rouble.
An analysis of AXA Investment taken up by the daily The world highlights, however, the gradual transfer, over the years, of Russian public debt from the hands of foreigners to those of Russian investors. For its part, the state budget is in balance with a barrel of oil around US$40, while it is currently hovering around US$100. “In addition, only 50% of its exports are settled in greenbacks, against 80% in 2014. Above all, the main source of foreign currency, exports of raw materials remain spared. “Russia continues for the moment to sell its gas and its oil without hindrance. At the rate of 240 billion dollars of exports per year, or 15% of its GDP. »
Added to this is the feared effect of contagion to the entire economy from disruptions in the supply of raw materials, agri-food products and critical metals in an already overheated inflationary environment.
All eyes are now on China and the People’s Bank of China.