Here’s what a bank run could do to the Russian economy

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In the early morning of Saturday February 26, the Russians waited in long lines who meandered around corners to withdraw cash from ATMs, fearing the country’s banking system could crumble under waves of sanctions imposed after President Vladimir Putin ordered an invasion of neighboring Ukraine.

“There are about 70 people online. Eyewitnesses say the money in the ATM runs out in 40 minutes,” said Jason Corcoran, an Irish journalist in Moscow. wrote on Twitter. Russia’s central bank has had to increase the amount of money it supplies to ATMs after demand for cash hit its highest level since March 2020. The Bank of Russia also posted a notice on its website web to calm customers down, reassuring them that their money was safe. According to a translation by The New York Times, the notice read: “The volume of banknotes ready to be loaded into ATMs is more than sufficient. All customer funds in bank accounts are fully retained and available for all transactions. »

But the Russians still had doubts, especially after the ruble fell about 30% against the US dollar last week. The drop came after the United States and its European allies announced unprecedented sanctions. They include banning SWIFT from some Russian banks – the world bank’s Gmail that facilitates global bank-to-bank transactions – and freezing Russia’s international currency reserves, stifling Russia’s ability to offset the impact Sanctions. Historically, bank runs have been driven by fear rather than bankruptcy, but Russian concerns are not without merit: the economy is in jeopardy and no one wants to be the last one out. Moreover, an uncontrolled bank run could lead to real bank failures.

Banning a country’s banks from using SWIFT has been called a nuclear option when it comes to financial sanctions. Dozens of Iranian banks lost access to the messaging system in 2012 as part of sanctions against its nuclear program. Iran has lost nearly half of its oil export revenue and 30% of its foreign trade. Take the example of Russia’s largest lender, the majority state-owned Sberbank. The bank, which owns about a third of banking assets in Russia, is among those launched by SWIFT. After Sberbank was banned from the international messaging system, the European Union’s Single Resolution Board suspended most payments in Sberbank Europe divisions after sanctions sparked a run on banks.

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Russia’s banking system was further crippled after its central bank was prevented from tapping into the billions in foreign exchange reserves it had hidden in banks around the world. As of mid-February, Russia had about $643 billion in international reserves, according to Bank of Russia figures. Normally, in the event of a currency crisis, the central bank could sell these reserves in order to support the value of its own currency. European officials say at least half of the funds would be frozen due to Western sanctions.

Experts believe the unrest could heighten fear among Russians and accelerate bank runs. “We believe that RBC [Russia’s central bank] will have to institute strict capital controls and possibly declare a public holiday as bank runs accelerate and demand for foreign currency continues to rise sharply,” the Institute of International Finance said in a February 28 report. The next day, Putin signed an executive order prohibiting Russian residents from taking more than $100,000 of foreign currency in cash out of the country. Russian exporting companies have also been asked to sell 80% of their foreign exchange earnings to support the ruble. The central bank also raised interest rates from 9.5% to 20% as a last-ditch effort to control a run on banks.

“There is nothing left to support the ruble. [They will] turn on the printing press. Hyperinflation and economic catastrophe are imminent,” former Russian Prime Minister Mikhail Kasyanov said. predicted on Twitter. Russia can print more rubles to quell a run on the banks, but that would trigger runaway domestic inflation and even more currency depreciation.
The Russian bank will probably not run out of money anytime soon. The energy superpower still has a lifeline as long as it can receive oil payments in foreign currencies. The United States and its allies are reluctant to target its energy sector because of the global reliance on Russian oil and gas. But the pain for Russian residents is real and the bank run may not stop in the short term. In the worst-case scenario, a bank run could turn into a self-fulfilling prophecy: the more people withdraw money, the greater the likelihood of default.

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