The Russian economy faces a turbulent period as the United States, the European Union, the United Kingdom, and other western countries announced a series of sanctions against Russia after it launched a full-fledged war against its neighbouring country, Ukraine, on February 25. As the war entered the sixth day, the Russian economy has started feeling the effects of conflict, with the stock market continuing to fall and the value of ruble hitting a record low, making it difficult to prevent financial meltdown.
From record fall in local currency (ruble) to a sharp spike in interest rates, challenges are aplenty for the Russian economy. The sanctions against Russia’s financial institutions and businesses, restrictions on the government to raise capital, and cutting off access to critical technologies make the case for recovery worse.
Here are the key challenges Russian economy faces:
Record slump in Ruble
The Russian currency, ruble, plunged nearly 30% against the U.S. dollar on Monday, hitting an all-time low as market sentiments were dented by sanctions on the country's financial sector amid a growing backlash against its invasion of Ukraine.
The value of ruble has dropped to less than 1 U.S. cent after the Western countries announced a flurry of sanctions against Russia and blocked some banks and financial institutions from using the SWIFT international payment system and imposed a ban on the use of its foreign currency reserves.
A weaker ruble could add inflationary pressure to the economy, which could potentially hurt Russians whose budgets will be stretched due to rising costs.
Russia's central bank doubles key rate to 20%
Russia's central bank on Monday sharply raised its key interest rate to 20% from 9.5% as the U.S. and its allies imposed sanctions on Moscow in response to the invasion of Ukraine. The Central Bank of the Russian Federation, also known as the Bank of Russia, announced a massive hike in interest rates to ensure a rise in deposit rates to levels needed to compensate for the increased depreciation in local currency and inflation risks.
“This is needed to support financial and price stability and protect the savings of citizens from depreciation,” Bank of Russia said in a statement on Monday.
“Further key rate decisions will be made taking into account risks posed by external and domestic conditions and the reaction of financial markets, as well as actual and expected inflation movements relative to the target and economic developments over forecast period,” it added.
Global companies cut exposure to Russia
British bank HSBC and energy majors BP and Shell have joined the global campaign to isolate Russia’s economy by cutting their exposure to the country. The decision was taken after the U.S., the European Union and other Western countries imposed extra sanctions on Russian individuals and institutions in response to its invasion of Ukraine.
Global British bank HSBC has said it would end relations with a host of Russian banks including VTB, the country’s second largest lender.
Energy giant BP plc has decided to exit Russian oil company Rosneft by taking a financial hit of as much as $25 billion as part of the effort to isolate Russia’s economy. Similarly, Shell has also announced to exit all its Russian operations, including the flagship Sakhalin-2 plant. The company owns a 27.5% stake in the Sakhalin-2 plant, while Russian gas group Gazprom holds a 50% stake in the company.
Among others, Norwegian energy major Equinor has also decided to divest its joint ventures in Russia.
Moscow Stock Exchange suspends trading
Russia’s Moscow stock exchange has been shut for the last two days as the country’s central bank tries to manage the crisis situation after a flurry of harsh sanctions were imposed on Russia. The exchange had suspended stock trading after Russian President Vladimir Putin ordered military operations in Ukraine.
“Given the current situation, the Bank of Russia decided not to start trading sessions in MOEX Equity, derivatives, and standardised OTC derivative markets. Trading schedule of the Moscow Exchange for March 1, 2022 will be published on the Bank of Russia website on March 1, 2022 before 9:00 Moscow time,” Russia’s central bank said in a release on Monday.