Russia in Financial Crisis (Again), Ruble Crashes (Again), Central Bank Hikes Rates (Again), US Stocks Shrug (Again)

A financial crisis in Russia simply does not have the same effect on the United States as a financial crisis brewed in the United States.

By Wolf Richter for WOLF STREET.

Earlier in the day, the ruble tumbled nearly 30% to 117 rubles to buy $1 from around 83 rubles on Friday amid the wide array of sanctions, many of which target Russia’s financial system.

The Central Bank of Russia has put in place many emergency measures to contain the chaos, the bank runs, the frantic hunt for dollars and to support the value of the ruble. Those measures included capital controls, a promise of unlimited ruble liquidity for banks and the mother of all rate hikes: 1,050 basis points, from 9.5% on Friday to 20% on Monday. This managed to mitigate the collapse of the ruble on Monday, which now trades at 103 rubles to the dollar.

As the 25-year chart below shows, ruble crashes and financial crises occur regularly in Russia: 1998 Russian financial crisis, Russia’s share of the global financial crisis, 2014 Russian financial crisis and now the Russian financial crisis of 2022. In those 25 years, the ruble has crashed 97% against the USD (chart via Trading Economics):

The last two Russian financial crises (2014 and 2022) were triggered by the sanctions imposed on Russia after its invasion of Ukraine. But the sanctions implemented so far are much tougher and target the Russian financial system much deeper than previous sanctions. And the consequences for the Russian financial system are likely to be more serious as well.

And the Central Bank of Russia also reacted more. In 2014 and 2015, it raised its key rate from 5.5% to 15% in several rate hikes. This time, the Central Bank had already raised its key rate eight times, totaling 525 basis points, to 9.5%, to combat runaway inflation. And today, it raised its policy rate by another 1,050 basis points to 20%.

These ruble crashes are why long-term ruble-denominated debt is toxic, and there are few takers and the yields are very high, and that’s why Russia can’t borrow much in rubles. And anyone who owns ruble debt right now has just suffered a huge loss in terms of the purchasing power of those bonds. Bond trading in Russia is suspended for the time being.

Russia borrows in foreign currency, some directly in the form of sovereign debt, and much through its giant state-owned enterprises which are big exporters of crude oil, natural gas, metals, other raw materials and military equipment.

In terms of government-issued foreign-currency debt, the cost of its default insurance has soared to levels that indicate a 56% probability of default, according to Bloomberg.

During the Russian financial crisis of 1998, the government defaulted on its foreign currency debts.

Russian banks in Russia, which are in great difficulty, will be supported by the Central Bank. Private shareholders can be wiped out and replaced by the state. Sberbank, Russia’s largest bank, is already majority state-owned (50% plus one voting share). On Monday, authorities closed the stock market in Russia and shares are not trading.

But the ECB, as banking regulator, announced on Monday that Sberbank’s wholly-owned subsidiary in Austria – Sberbank Europe AG, its branches in Germany and its subsidiaries in Croatia, Slovenia, Hungary and Serbia – “is in bankrupt or is likely to go bankrupt due to a deterioration in their liquidity situation” – caused by bank runs, when depositors attempted to withdraw their money.

“The ECB has made this decision after determining that in the near future the bank is unlikely to be able to pay its debts or other commitments as they fall due,” the ECB said.

“And there are no measures available with a realistic chance of restoring this position at group level and in each of its subsidiaries within the banking union,” the ECB said, indicating that it will not bail out. the Russian bank in Europe.

Depositors of European entities of Sberbank are protected by national deposit insurance programs up to €100,000 per depositor per bank. If depositors respect the limits, they will be compensated by their national deposit insurance programs.

Thus, Sberbank Europe AG and its subsidiaries are likely to be resolved by banking regulators. The bank is relatively small, with 14 billion euros in assets. But during the Russian financial crisis of 2014, the ECB deemed the bank “important” due to the scale of its cross-border activities, and thus placed the bank under its direct supervision.

If the bank is resolute, the shareholder, Sberbank of Russia, is the first to be bailed out, by definition, as the bank’s shareholders always are.

The Russian financial crises had little impact on the US economy and financial markets. In 1998, the US economy and stock market were booming, the dotcom bubble was in full swing, and it had over a year to go. In 2014, as the US economy recovered from its own financial crisis, the Fed ended QE, while the economy and markets struggled.

But the Russian financial crises had a significant impact on the economies of Russia’s smaller neighbors.

And they had serious consequences for the people of Russia, often exposing them to personal hardship. Russia imports vast quantities of consumer goods, from cars and consumer electronics to food, and a collapse of the ruble guarantees a massive spike in consumer price inflation for people who earn their living in rubles.

But a major disruption in Russian exports of crude oil, natural gas, metals and other raw materials could further increase commodity prices, which could further increase inflationary pressures in other countries, not so much in the States. States, which produce most of their own energy. , but in Europe, to which a large part of Russia’s energy exports go.

U.S. Crude Oil Grade WTI is now trading at around $95 a barrel. It briefly touched $100 a barrel last week. In 2008, it reached $150 a barrel. Brent is already trading above $101 a barrel.

Emerging Markets Equity and Bond Fund can be tricky, depending on how much exposure to Russian stocks and bonds they have. There are reports that a European emerging markets fund has been shut down, and more may follow, with investors unable to withdraw their money until there is clarity on Russian assets. With trading in Russian stocks and bonds suspended in Russia, and on some other exchanges, it’s hard to get a feel for prices, and the trigger makes sense until there’s more clarity. .

US and European banks, and many global companies have some exposure to Russia and could take a hit. Among the first confessions:

BP may be the greatest. He announced on Sunday that he would “exit” — presumably sell — his 19.75% stake in Rosneft, triggering a large-scale “non-cash” writedown that includes the loss on his stake, which was valued on the books of BP at $14 billion. The hilarious writedown also includes $11 billion in foreign exchange losses that have “accumulated since 2013” due to the ruble’s collapse, but just haven’t had a chance to show up in the account yet. result, hahahahaha. BP shares fell 5%, no problem.

Citigroup revealed in a filing today, reported by Bloomberg, that it had $9.8 billion of exposure to Russia at the end of the fourth quarter. This exposure includes $5.4 billion in country exposure, $1 billion in cash and placements with the Russian Central Bank and banks, $1.8 billion in reverse repos with various counterparties, and 1. $6 billion exposure to Russian entities outside of Russia. Citi shares fell 5%, no problem.

Actions in the United States are emerging from the biggest stock market bubble ever, fueled by $4.7 trillion in Fed money printing in 23 months. Individual stocks started exploding a year ago, stock by stock, until the global indexes finally started to show the damage: the Nasdaq from late November and the S&P 500 at the start of this year, in a context of runaway inflation, end of QE, upcoming rate hikes and QT.

Now the stock market has an extra thing or two to worry about, and is still in full bubble territory, with plenty of air space below. After a strong two-day rebound on Thursday and Friday that followed five days of heavy losses, the S&P 500 lost only a little ground on Monday, giving up some of Friday’s gains. Not serious. A financial crisis in Russia simply does not have the same effect on the United States as a financial crisis brewing in the United States.

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