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Rouble/interest rates: knock-on effects of sanctions will ripple beyond Russia

Tanks are harbingers of financial chaos as well as physical destruction. Russia knows this as well as any other country. The first Chechen war emptied the coffers of the government and accelerated the Russian financial crisis of 1998. The question this time is how far the ripples will spread beyond Russia.

The most worrying message is Free fall of the ruble After Western leaders proposed much harsher sanctions. They plan to freeze assets of the Russian central bank, ban transactions with it and expel some Russian banks from Swift’s international payment network.

The shock over Russia’s estimated $ 630 billion in foreign exchange is reduced by its transfer to assets that the West cannot touch and relatively low government debt levels. Despite this, the sanctions package is a declaration of financial war.

The central bank doubled the interest rate to 20% to protect the ruble. But the currency fell nearly one-fifth to 104 against the US dollar. Russians have been queuing at ATMs since Sunday.

The liquidity evaporated in the blink of an eye. The stock exchange did not open. Ruble bonds were not traded. Euro-dollar bonds fell by half. The cost of Russian default insurance swaps has risen to 37% of the face value of the bonds.

The global financial system is fragile. The plague is not over yet and government balance sheets are laden with debt. There is room for the Russian financial crisis to intensify other shocks – rising food prices in emerging markets, for example. Financial crises overlapped in Russia and Asia in the late 1990s. The victims included the American hedge fund Long-Term Capital Management.

War and sanctions will hurt local economic growth and inflate prices, which are exported to the wider world through oil and gas denominated in hard currency.

To be sure, exposures this time around are usually less noticeable. Russia has declined in importance as an investable market, accounting for less than 4% of MSCI’s emerging markets stock index.

But there will be plenty of pockets of financial pain, from businesses renting planes to Aeroflot to luxurious British boarding schools with Russian students. Bond coupon payments will be disrupted. There is an increased risk of such cyber attacks Toyota suffered.

The most subtle threat is of sprains we cannot anticipate: moments of Lehman in which panic spreads and markets take over. Small or medium barriers for businesses then become existential threats. The meaning of the war is that this threat is greater now than it has been since the first days of the plague.

The Lex team is interested in hearing more from readers. Please tell us how serious you think the Ukrainian war is about financial stability in the comments section below

Rouble/interest rates: knock-on effects of sanctions will ripple beyond Russia Source link Rouble/interest rates: knock-on effects of sanctions will ripple beyond Russia

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