From Ruble To Rubble

Russian President Vladimir Putin’s brutal, unprovoked invasion of Ukraine is bringing the Russian economy to its knees. Nothing tells the world faster what investors are thinking than the world’s largest financial market, the foreign exchange market. This $7 trillion daily turnover market is incredibly sensitive to country and economic risks. The ruble was stable after Russia sent troops to the Donbas region of Ukraine on February 21 and even when it invaded Ukraine three days later.

One day before the invasion, the Bank of Russia, Russia’s central bank had intervened in the foreign exchange market by selling $1 billion dollars to provide support for the ruble. The Bank of Russia sold more foreign currency also on Friday. On Monday, the ruble began at 83.53 to the US Dollar and as announcements of different sanctions and divestments began, the ruble plunged over 30% in less than four hours to RUR 109. Russia has a long history of local currency crises and devaluations. Yet, even in the context of that history, the Bank of Russia’s significant sales of foreign currency will go down in foreign exchange market history books as some of the most ineffectual moves conducted by a foreign exchange department of a central bank.

The Bank of Russia’s foreign exchange and interest rate measures to calm markets are all strong signs of desperation. The Russian central bank raised interest rates to over 20% on Monday from its Friday level of 9.5%. That 111% rate did not rise and will not calm domestic or foreign market participants. I have seen this movie several times in my career. It always ends badly. I started my career at the Federal Reserve as a foreign exchange analyst and witnessed the desperate interest rate hike moves by European central banks as they tried to stem foreign exchange outflows during the Nordic crisis and the UK withdrawal from the European Exchange Rate Mechanism. The more central banks raise rates significantly, the more corporate executives and ordinary citizens run out the door simultaneously. Fear is palpable, moves quickly, and is contagious.

Also on Monday, the Russian Finance Minister Anton Siluanov ordered Russian exporting companies to sell 80% of their foreign exchange reserves to prop up the plunging ruble. To no one’s surprise, this caused the ruble to depreciate even further. Few things scare citizens and investors more than government interventionist officials telling companies what to do with their profits and reserves. Ordinary Russians have been rushing to their banks to withdraw money as fast as they can.