The problems caused by the annexation of Crimea are coming home to roost in Russia as the Bank of Russia will prop up the ruble. According to Central Banking dot com,
Russia has more than quadrupled the amount of dollars it is prepared to sell to maintain the value of the ruble at a given level. It unveiled the move yesterday, hours after it surprised the markets with a 150 basis point hike to its key policy rate aimed at calming foreign exchange volatility.
The Bank of Russia will now spend up to $1.5 billion before it shifts the target band for the ruble against a basket of $0.55 and €0.45, compared with the previous trigger of $350 million. The central bank was yesterday seen spending up to $12 billion to stabilize the value of the ruble, with international investors taking fright at growing tensions between Russia and Ukraine, and a threat of international sanctions against Russia.
And Trading in Rubles instead of Dollars and Euros
Online Pravda notes that Russia will be taking other steps in response on mounting Western sanctions in the aftermath of the annexation of Crimea by the Russian Federation and continued Russian troop buildups on Ukraine’s Eastern border. Now it seems that in response to Western sanctions Russia will switch to Ruble settlements in trade with the West.
In response to economic sanctions of the West, Russia intends to switch to rubles in its deals with European partners instead of dollars and euros. State-owned export companies are said to be the first on the line to do it.
Pravda quotes Adrei Kostin, the head of the state owned VTB Bank. Kostin said that this would
“reduce dependence on the vagaries of the US and EU authorities” that continue to threaten Russia with sanctions. “It has been a month already when senior Western executives call to isolate Russia, by virtually destroying the Russian banking sector with the use of modern “nuclear weapon” in finance – dollar settlements,” said Kostin.
Coincidentally, officials with the Russian Foreign Ministry said that U.S. bank JPMorgan Chase blocked a dollar transaction from the Russian Embassy in Astana to insurance company Sogas. The transfer was blocked “under the pretext of anti-Russian sanctions.”
Running Out of Dollars
There is a distinct flaw in the Russian strategy of selling dollars for Rubles to prop up their currency. They need more dollars! According to the Wall Street Journal,
Russia’s finance ministry will resume buying foreign currencies to replenish the rainy-day reserve fund in the coming days…
This action comes on the heels of a concerted effort to support the Ruble by selling dollars and euros to purchase Rubles.
Why Is this Happening?
Russia is selling dollars because a weak Ruble because its president decided to take over part of a neighboring country. President Vladimir Putin of the Russian Federation believes that the breakup of the former Soviet Union was the worst disaster to ever befall his country. That statement is made by someone who is fully aware of the millions killed in purges in the Stalin era and in the more than twenty million Russians who died during the Second World War. Political unrest in neighboring Ukraine resulted in the ouster of a pro-Russian and corrupt president. Mr. Putin took advantage of the resulting chaos and orchestrated a takeover of Crimea, part of Ukraine that borders the Black Sea. Now the West is ramping up economic sanctions that threatening to isolate Russia and drive the ruble into oblivion.