The COVID World post date: March 1st, 2022
By Edward Slavsquat
So much has happened over the past 48 hours that your humble Moscow correspondent has struggled to type a single sentence. Well, we have to start somewhere. So let’s start with the unprecedented sanctions that could potentially trigger a global economic meltdown.
On Sunday, the European Union, the United States, Great Britain and Canada jointly announced they would freeze the reserves of the Bank of Russia. So what? All of Russia’s delicious foreign reserves are safe and sound in an underground vault in Moscow, right? Wrong.
The Bank of Russia’s mountain of reserves was allegedly supposed to protect from western financial trickery. Except… how does that work if you keep a huge portion of these assets in foreign securities or in banks that are vulnerable to sanctions? And that’s exactly what Russia’s central bank did. And now we have a problem.
This is not good:
As of February 1st, the Central Bank of the Russian Federation had $630.2 billion in reserves, including $113.5 billion from the liquid part of the National Welfare Fund.
Almost half of the reserves ($311.2 billion) are placed in foreign securities, a quarter ($151.9 billion) – on deposits with foreign commercial and central banks. 132.2 billion dollars of reserves (21%) is physical gold located mainly in the vaults of the Central Bank within Russia.
39% of the reserves are held in countries that have imposed sanctions.
Most of the Bank of Russia’s gold is somewhere in Russia. The sanctions primarily affect other assets held abroad. However, the outlook here is not exactly rosy. The deputy chief economist at the Institute of International Finance, Elena Rybakova warns:
“Sanctions against the Bank of Russia could have a huge effect on the Russian economy and banking system similar to what we saw in 1991. This could lead to a run on depositors and dollarization, a sharp fall [of the ruble], depletion of reserves—and possibly the complete collapse of the Russian financial system.”
Another Russian media report gave a similar economic forecast:
“Most likely, about 70%, if not 75% of the assets of the Central Bank will be blocked. This means that the Central Bank will no longer support the ruble.”
Russia’s state-run RIA Novosti described the foreign reserves freeze as a “robbery” and warned of economic chaos on a global scale:
Again, things are quite precarious. Anatoly Aksakov, head of the State Duma Committee on the financial market, assessed what is happening now with Russian reserves.
“This is actually an attempt, this is theft, in fact, someone else’s property is being snatched away.”
Analysts state that such extreme financial sanctions will hit not only the Russian financial system but throughout the world. The freezing of transactions means that the work of any counterparties in the European Union, as well as the United States and Canada, will be suspended. The Bank of Russia will not be able to buy and sell foreign currency, and this will deprive European and American partners of the opportunity to pay for Russian [energy!!] exports.
What now?
The Bank of Russia has resumed gold purchases. Russia’s central bank stopped gobbling up gold in April 2020.
Meanwhile, Russia’s finance ministry has instructed exporters to sell 80% of their foreign exchange earnings.
The central bank announced yesterday that the key rate has been raised to 20%:
External conditions for the Russian economy have changed dramatically. An increase in the key rate will make it possible to ensure an increase in deposit rates to the levels necessary to compensate for the increased devaluation and inflation risks. This will help maintain financial and price stability and protect citizens’ savings from depreciation.
It’s too soon to say whether we are witnessing a temporary market panic or something truly catastrophic. It’s 2022. Anything is possible. Never forget that.
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Before serving within the US Federal Government, Benjamin was Director of Security at Corporate Executive Board.