Russia’s currency plummeted in overnight trade and the ruble plummeted against the dollar.
Why it matters: The dive shows that ever-mounting sanctions by the US, European Union and UK will inflict massive pain on Russia’s economy – the 11th largest in the world – and its people, in a shock that could reverberate throughout the global financial system.
Details: Just before midnight in New York, the ruble lost more than 25% against the dollar, according to FactSet data.
- Since the beginning of the year, the currency has fallen more than 40%.
How it works: Such a blow to a country’s currency falls somewhere along the line between economic and psychological warfare.
- It threatens to vaporize much of the ruble-based savings in Russia’s banks.
- It will drive up inflation rates – which are already high in Russia – significantly.
- It drives people to withdraw their cash en masse and quickly try to convert it into more stable currencies like the dollar, the euro, gold or even cryptocurrencies. (ATM runs began in Russia over the weekend.)
- It’s driving interest rates higher as global investors shy away from the idea of lending to banks or countries using a currency that could become worthless.
- High interest rates slow the economy and throw people out of work while prices soar, a miserable combination of conditions known as stagflation.
What we observe: Such a large economic shock will rock global markets, likely in unpredictable ways. Investors appear to be hedging by moving out of risky markets into the safety of government bonds.
- Futures markets point to a tumble once New York stock trading begins.
- US Treasury bond prices have risen sharply as investors rush to buy what is widely regarded as the world’s least risky asset.
Flashback: It cannot be ruled out that a financial player – for example a hedge fund – cannot absorb such a large shock. Remember, it was the Russian government’s default on its bonds in 1998 that killed hedge fund Long-Term Capital Management and nearly triggered a financial crisis.
Editor’s Note: This article has been updated with details of Bank of Russia actions.
