Russian Ruble Outlook:
- The response by the European Union and the United States to the Russian invasion of Ukraine escalated dramatically over the weekend.
- More impactful than limiting some Russian banks access to SWIFT, the freeze of assets held by the Central Bank of Russia is far more impactful.
- A currency crisis has begun for the Russian Ruble.
Financial Nuclear War
The Russian invasion of Ukraine this week was initially met with platitudes and handwringing that has so often defined the European Union’s and United States’ (“the West”) response to crises in recent years. At first glance[1], a Russian economy (1) with a debt-to-GDP ratio around 18%, (2) over 80% of government-issued debt denominated in Russian Rubles, and (3) high energy prices having filled Russia’s coffers over the past year, seemed like it would be able to weather any economic or financial repercussions – so long as the invasion of Ukraine proved short-lived.
But as the Ukrainian army and population have mustered a formidable resistance, the European Union’s and United States’ response evolved dramatically[2]. On Saturday, the West announced that some Russian financial institutions would be cut off from SWIFT, the global messaging platform that allows banks to communicate and send funds securely to one another. Japan joined the West on Sunday in such an effort. Russian companies will have a difficult, if not impossible, time importing and exporting goods and services moving forward.
What is SWIFT? (Chart 1)
Yet removing Russian access to SWIFT is incomparable to the other effort taken by the European Union and the United States: freezing the Russian central bank’s assets. The Central Bank of Russia (“CBR”) has roughly $630 billion in foreign reserves, most of which are now inaccessible. The immediate effect is
