1) Russia is likely entering a financial crisis. The Russian ruble has tumbled. The central bank has hiked rates to 20%. Russian corporates are being ordered to sell large portions of their US dollar revenues. And capital controls are being imposed.
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Russia is likely entering a financial crisis. The Russian ruble has tumbled. The central bank has hiked rates to 20%. Russian corporates are being ordered to sell large portions of their US dollar revenues. And capital controls are being imposed.
Sanctioning the Central Bank of Russia (CBR) is a very aggressive move. Sanctioning a central bank is very unusual but has been done before (Iran, Syria, Venezuela, and North Korea). The CBR would lose the use of most of its FX reserves (currently $640 billion).
The biggest uncertainty is whether the EU/US will keep carve-outs for energy trade in SWIFT and CBR restrictions. If energy trade is curtailed or frozen, we could see a big oil shock. Currently, there appears to be language that still allows energy trade, e.g., transactions with the CBR to ensure the financial stability of the EU area.
Germany has fundamentally pivoted its position on defence, energy and Russia. German Chancellor Olaf Scholz gave his ‘turning point’ speech over the weekend. He pledged to ramp up military spending to 2% of GDP and commit to building weapons in Europe, recognising that Russia cannot be trusted: ‘eliminate [Germany’s] dependence on imports from individual energy suppliers’ and increase fiscal spending to deal with the energy shock.
Russia has been mixed on cryptocurrency. But the above actions could see Russia embrace crypto to evade sanctions. This could accelerate Western regulation of crypto in response to this possibility.
A huge risk now is that a cornered President Vladimir Putin may decide to induce a global oil shock like those we saw in the 1970s to tip the global economy into a recession.
For investors, this adds to even more uncertainty, suggesting we should maintain a defensive posture to markets. In these types of environments, we like holding more cash than usual. Even though it does not give us any yield, it lets us easily buy assets when their prices tumble.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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