- Russia is entering a full financial crisis. The RUB is collapsing (official USD/RUB up 32%, at 110, and onshore retail rates at 160), CBR has hiked rates to 20%, Russian corporates have to sell 80% of their USD revenues and capital controls.
- 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, North Korea). CBR would lose use of most of its FX reserves. There could be scope for them to pledge their gold to another central bank to get dollars. PBoC would be the obvious central bank, but this will likely only be in the context of getting cheap commodities rather than supporting the broader Russian economy.
- The biggest uncertainty here is whether the EU/US will keep carve-outs for energy trade (SWIFT and CBR). If energy trade is curtailed or frozen, then we could see a big oil shock. This could be a global risk off event. At the moment, there appears to be language that still allows energy trade e.g., transactions with CBR to ensure financial stability of the EU area allowed.
- Germany has fundamentally pivoted its position on defence, energy and Russia. German Chancellor Scholz gave his ‘turning point’ speech on the weekend. In it 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 our [Germany’s] dependence on imports from individual energy suppliers’ and increase fiscal spending on dealing with the energy shock.
- Europe could start to nationalise the European subsidiaries of Russian banks on the pretext of them failing to meet liquidity requirements.
- 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 Putin may decide to induce a global oil shock like the ones we saw in the 1970s to tip the global economy into a recession.
- In terms of markets, outside of Russian markets, we’re seeing commodity prices surge (Nat Gas up 20%), oil up 5% and wheat up 5%. In FX, HUF and PLN have fallen 2%. Rates are rallying (US 10y down 5bps) and equities are down around 1% to 2%. My sense is that the market could be underappreciating the risks of a continued rise in oil prices.
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