Russian Banks On The Edge Of Crisis

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By TBN Staff


Russia was scrambling Monday to avoid a financial disaster as its economy was slammed by a slew of crippling Western sanctions announced over the weekend in reaction to Ukraine’s invasion.

President Vladimir Putin met with his top economic advisers to discuss the issue after the ruble fell to a historic low against the US dollar. The Russian central bank charges more than quadrupled interest rates to 20%. The Moscow stock exchange was closed for the day. The central bank has declared that it will remain closed on Tuesday.

The European unit of Russia’s largest bank was on the verge of failure as depositors hurried to withdraw their funds. Economists predict that the Russian economy will contract by 5%. The ruble had lost almost 25% of its value and was trading at 104 to the dollar at 12:15 p.m. ET, after falling as high as 40% earlier. According to a statement from the country’s central bank, trading on the Russian stock exchange has been delayed and then postponed outright. On the other hand, The United States and European Nations blocked certain Russian banks from the SWIFT payment system.

Who owns SWIFT?

Under Belgian legislation, SWIFT is a cooperative enterprise. According to the company’s website, “it is owned and controlled by its shareholders [financial institutions] representing about 3,500 firms from throughout the world.”

The system is governed by the G10 central banks and the European Central Bank, with the National Bank of Belgium serving as the system’s chief supervisor.

What role does Russia play?

According to the Russian National SWIFT Association, Russia has the second-highest number of users behind the United States, with over 300 Russian financial institutions on the system, accounting for more than half of Russia’s financial institutions.

According to Alicia Garcia Herrero, head economist for the Asia Pacific at Natixis in Hong Kong, Russia’s exclusion from SWIFT would be a significant blow to the country.

“[It’s significant] because no debt or trade finance payments can be made. It is more serious than halting EU imports of Russian gas,” Garcia Herrero told Al Jazeera.

Reserves are kept frozen

Putin’s government has spent the last eight years preparing Russia for harsh sanctions by amassing $630 billion in overseas assets, including currencies and gold. Still, at least some of that financial firepower is now frozen, and his “fortress” economy is under unprecedented attack.

According to the top US administration officials, the US also prohibited US dollar transactions with the Russian central bank to prevent Moscow from accessing its “rainy day fund,” according to top US administration officials.

According to Capital Economics’ Peach, at least half of Russia’s reserves are now off-limits to Moscow.

Russia is a significant oil and gas exporter, but many other sectors of the economy rely on imports. They will become considerably more expensive as the ruble’s value falls.
As the ruble’s value falls, they will become much more expensive to purchase, driving up inflation.

The crackdown on its leading banks, as well as the exclusion of some of them from the SWIFT secure messaging system, which connects financial institutions all over the world, will make it more challenging to sell exports, including oil and gas, even though Russia’s vital energy trade has not yet been directly targeted with sanctions.

What has Russia said so far?

In January, Nikolay Zhuravlev, vice-speaker of Russia’s Federation Council, acknowledged that the country might be kicked out of SWIFT.

“SWIFT is a service, not a settlement system.” As a result, if Russia is cut off from SWIFT, we will not receive [foreign] currency, but buyers, primarily European countries, will not receive our goods – oil, gas, metals, and other vital components of their imports. Do they require it? “I’m not sure,” Zhuravlev remarked.

Zhuravlev also pointed out that, while SWIFT is convenient, it is not the only route to transmit money. A decision like suspending a country would require unanimous agreement among members.

What exactly does the suspension imply?

Russian banks will find it more challenging to interact with counterparts abroad, even in friendly nations such as China, slowing commerce and increasing transaction costs.
However, the allies, who have also promised to limit Russia’s central bank’s capacity to defend the rouble, have not yet specified which banks will be targeted. According to sanctions and banking specialists, this would be critical to the measure’s effectiveness.
According to Sergey Aleksashenko, a former deputy chairman of the Russian central bank who now lives in the United States, the sanctions are likely to significantly impact the rouble when markets open on Monday, resulting in the disappearance of numerous imports to Russia.