Sanctions prevent Russia from supporting the ruble

The combination of the war in Ukraine itself and the international sanctions it triggered sent the ruble plummeting on Monday morning. The Russian currency started the trading day losing a quarter of its value.

Russia’s central bank had a plan in place to support the ruble in an emergency – a rainy day fund worth more than $600 billion, including assets parked in banks and institutions around the world. whole world.

On Monday, the US Treasury announced it was freezing central bank assets held in the United States. Other major US allies have done the same. It will be difficult, if not impossible, for the Russian central bank to use these reserves to save the currency.

Russia began building up its foreign exchange reserves – which now total nearly $650 billion – after invading Ukraine’s Crimea region in 2014 to hedge against future financial sanctions.

But how does it work ?

“Central banks, they hold foreign exchange reserves,” said Ousmene Mandeng of the London School of Economics. They hold these reserves in banks abroad. “And the name is a bit misleading – because it’s not change in the sense of currency, it’s not that there are banknotes in their vaults. But generally, it’s securities that they should liquidate first,” he said.

For example, American stocks or German bonds that Russia could sell to convert them into dollars or euros.

“And then they can use those bank balances to intervene, for example, in the foreign exchange market,” Mandeng said, buying rubles with those dollars or euros to try to bolster the currency.

“While in theory you own the titles, well, in the event of sanctions, there are limitations on your access to your titles,” he said. So Russia is stuck and no one – not international bankers, stock brokers or currency traders – can escape.

“The purpose of these sanctions is to prevent Russia from using its reserves,” said Karen Petrou of Federal Financial Analytics.

She pointed out that US and European authorities are freezing, not seizing, Russia’s foreign exchange reserves. “It takes nothing from Russia. Russia still has its reserves, but it cannot use them. They are useless, they don’t make sense, they are no longer a resource for a stable Russian system and the war against Ukraine,” she said.

There is a significant gap in these penalties, and that is for the purchase of oil and gas. That gives Russia a little leeway, according to Patrick Honohan, a former governor of the Central Bank of Ireland and now a fellow at the Peterson Institute for International Economics.

“Flows matter more than reserves. For this revenue stream from gas and oil exports to Russia to sustain them,” he said.

This can help Russia keep food in stores and maintain the flow of some crucial imports. But that will do nothing to help the ruble.

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