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People walking past a currency exchange office in Moscow yesterday AP/PA Images

Morning Memo: Western sanctions heap pressure on Russian banks

Russia’s currency has depreciated rapidly in the past few days of trade.

This is an extract from today’s edition of Morning Memo,’s daily business newsletter, which puts the biggest business and economics stories of the day into context for readers. We also include a reading list of some of the more interesting business and economics-tinged stories from around the internet. Find out more and sign up here or at the bottom of the page. 

UNPRECEDENTED WESTERN SANCTIONS, aimed at further isolating the Russian economy from the global financial system, are having a deep impact on ordinary Russians.

Yesterday, the Russian government announced a major interest rate hike and a range of capital controls aimed at stymying the flow of money out of the country as Russian citizens send their cash abroad amid the collapse of the rouble.

The new rules, which come into force today, will, among other things, ban Russian hard currency payments in relation to “loan agreements” with foreigners.

Bloomberg reports there has been confusion about whether this means Russian companies and households will not be allowed to service existing debts owed to foreign institutions. Although the Russian central bank later clarified the rules apply to new loans only, experts say the wording of the regulations will cause some anxiety and are open to interpretation. 

Russia’s currency has depreciated rapidly in the past few days of trade. At the same time, American and European moves to cut off the Russian central bank’s access to its store of foreign reserves — valued at about $630 billion — have effectively crippled the country’s response to currency volatility.

Normally, central banks would use these reserves to go to market and buy back their own currency in a time of crisis in a bid to stabilise it against speculation. But unable to access these emergency funds, the rouble went into an unprecedented freefall yesterday (although it had rebounded somewhat at the time of writing this morning after the interest rate hike and capital control announcement yesterday). 

One of the goals of these European and American sanctions seems to be to undermine the integrity of the Russian banking system. With Russian citizens increasingly panicked about the worthlessness of their currency, bank runs become a very real possibility. There were already reports over the weekend of long queues at ATMs as depositors scramble to withdraw their funds.

As economist Steve Hamilton writes, this move by the US is “just short of the nuclear option” and “there’s uncertainty about how bad it will get. Bank runs would inflict major damage on the Russian financial system. Short on crucial imports and with no ability to pay for them, domestic production would grind to a halt.”

Putin’s response to this kind of scenario is “anyone’s guess”, Hamilton believes. There is really no telling where this remarkable escalation of economic sanctions could end. 

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