Sanctions leave Russian rouble routed

The Russian rouble slumped to a record low against the U.S. dollar on Monday, depreciating 30% in the largest one-day move in the currency’s modern history, while the stock market had slumped 40% before trading halted. In response, the Bank of Russia  more than doubled interest rates to 20% in an emergency move, and told exporting companies to sell 80% of their foreign currency revenues in an attempt to support the rouble.

The market freefall came following a raft of stringent Western sanctions that effectively froze the majority of Russia’s foreign currency reserves—estimated at over USD 640 billion—and blocked a number of domestic banks from the SWIFT international payment settlement network in a bid to cause a banking crisis. Pre-empting the moves, the Bank of Russia sold around USD 1 billion in reserves in the days leading up to the sanctions. Still, the rouble’s collapse revealed an isolated government facing serious economic distress.

The weaker currency will raise import costs significantly and make external debts—many of which are denominated in USD—much harder to service. Furthermore, the rouble’s depreciation will accelerate the decline in living standards for Russia’s already-squeezed citizens; savings could be lost, citizens may lose access to their salaries and pensions, and capital controls have already been instigated to limit the flight of foreign currency from Russia.

Internationally, the main impacts will be felt in Ukraine itself, as its citizens brace themselves for the fight against invading forces. Elsewhere, countries and companies have been quick to dump Russian assets, piling pressure on the economy. Norway’s sovereign wealth fund said it would divest its Russian holdings, BP announced it would offload its 20% stake in state-owned Rosneft, S&P Global Ratings said it would cut the country’s ‘BBB-’ rating to junk status, and Germany froze the divisive Nord Stream 2 gas project that would have doubled the flow of Russian gas directly to Germany.

The latter move was indicative of the sort of impact the sanctions could have on European customers, with Russia providing Europe with nearly 40% of its natural gas imports and more than a quarter of the oil that it imports. Our panelists recently raised their 2022 inflation outlook for the Euro Area by 0.8 percentage points to 3.9% in our March edition amid already-elevated energy prices. The rise in prices of oil and gas since last Thursday’s invasion is likely to prompt a further hike in forecasts in our upcoming Euro Area publication in April.

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Commenting on the impact to the Russian economy, Clemens Grafe, economist at Goldman Sachs, noted:

“We think growth will be significantly impacted, and we have reduced our 2022 growth forecast from 2% yoy to -7% yoy. The uncertainty around this forecast is high. Financial conditions have tightened to a similar level to 2014, and hence we think domestic demand will contract by 10% yoy or slightly more. While exports are, in principle, not significantly restricted by the sanctions so far, we expect them to contract by 5% yoy because of the physical disruption of exports through the Black Sea ports, which are instrumental for dry bulk exports, and the risk of sanctions reducing other exports.”

Considering the scenario of rising energy prices, economists at Berenberg commented:

“Consider the potential impact of a rise in oil prices to USD 120 per barrel and elevated prices for natural gas. For the Eurozone, this would likely raise average inflation this year from the 3.5% call we made 10 days ago to 4.5% […]. The drag from higher prices and the negative confidence affect may lower real GDP growth in the Eurozone from 4.3% to 3.7% for 2022. The post-Omicron rebound in consumer spending would likely be delayed and somewhat shallower than otherwise.”

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