The Bank of Russia is desperately trying to prevent a run on Russian banks. Today, the Russian central bank announced that it would lower reserve requirements for banks. Central banks around the world require banks to have reserves at their central bank in order to protect them and their depositors from a bank run. Lowering reserves for Russian banks is a clear sign that Russian banks’ liquidity is decreasing. The central bank announced that the liquidity gap in the Russian banking system is now $68 billion dollars, a 27% increase in the gap in just one day.
This means that Russian banks are having difficulties meeting all of their obligations in a timely manner, especially as individuals and companies continue to withdraw their deposits from Russian banks. The more private sector companies divest from Russia and the more countries that find ways to increase compliance with sanctions, the lowering of the reserves will not be enough to stop a run on banks.
Monday S&P Global Ratings downgraded several banks, and today, Moody’s Ratings placed sixteen financial institutions on a ratings watch for possible downgrades. Also of significant concerns is that Russia’s biggest bank, Sberbank, closed its European legal entities after the European Central Bank ordered closure of those entities as part of the sanctions. The announcement of the sanctions caused Sberbank’s legal entities in continental Europe to become illiquid as depositors ran to take their money and as counterparties demanded Sberbank pay back all of its liabilities. Market reaction to Sberbank’s shares was certainly swift. Sberbank is trading for the equivalent of one US cent in the London markets.
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Earlier this week, the Bank of Russia hiked rates by 111% to over 20% in order to provide some support for the ruble. The central bank’s significant interest rate hike and its foreign exchange interventions in support of the ruble, so did not work. The ruble continued its descent. Moreover, since the Bank of Russia’s foreign exchange assets frozen around the world, the Bank of Russia has pretty much run out of tools to defend the ruble.