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"Bank Run Sweeps Across Russia As
Fears Of A Bank Meltdown Continue To Rise"
by Epic Economist
"Bank runs are sparking panic in Russia as citizens fear that a banking system meltdown occurs. Sanctions from the West have tied the hands of Russia’s central bank, leaving the agency without any power to prevent a catastrophic run on the ruble and consequently lead to the crash of the currency. The U.S., the U.K., and Canada all imposed sweeping restrictions on the Russian central bank to impede the agency from deploying its nearly $630 billion in international reserves to mitigate the impact of other Western sanctions, which include blocking some private Russian banks from SWIFT – a system that allows thousands of global financial institutions to communicate and authorize payments.
The exclusion from SWIFT has shaken Russia’s financial markets, leaving international traders, domestic investors, and bank customers extremely worried about the potential of sudden currency debasement. As markets opened this morning, millions of people started to rush to local ATMs to withdraw their money before they lost access to their savings. Over the weekend, local reports described that people were queuing in huge lines in a desperate attempt to take their money out of the system, but there simply wasn’t enough cash to meet the demand.
Given that demand for dollars is spiking, on Friday some lenders were reportedly selling dollars for more than a third higher than the market’s closing, and well past the level of 100 rubles per dollar. Yesterday, Commercial bank Tinkoff announced an exchange rate of 164 to the dollar for ruble sellers, and 92 for buyers — a massive spread that suggests people’s savings in the Russian currency will effectively halve in value.
For now, the situation remains completely unstable, and further sanctions and restrictions on the central bank can only make conditions worse, said Alexandra Suslina, a budget specialist at the Moscow-based Economic Expert Group. Suslina added that even though authorities can expand the domestic money supply, considering the rise in bank activity and ATM withdrawals, many people won’t be able to get their money out. “No cash machine is designed for the lines that will appear at sanctioned banks in the coming days,” she continued.
With all things considered, it’s clear that the Russian currency has fallen into a death spiral: Rising inflation will encourage people with rubles to convert those rubles into dollars, gold, or any other asset with a more stable value, consequently pushing the value of the ruble even lower. Moreover, commodities also faced a bumpy start this week as investors struggled to evaluate the impact of the latest sanctions in the flows of energy, metals, and crops. But another worrying prospect that hasn’t received much attention just yet is what is going to happen to the Western financial system as a result of the sudden expulsion of Russia - and its billions of dollars - from the global monetary system.
Credit Suisse monetary guru Zoltan Pozsar highlighted that by sanctioning the Russian central bank and the transfer agents for Eurobonds, then Russia will default on all foreign debt immediately. And if Russia tries to find a back door through China, the U.S. government will likely fine or sanction Chinese banks, which in turn, would prompt Chinese authorities to halt exports headed to America, collapsing our domestic supply chains.
Furthermore, Pozsar cautions that "if things escalate, it’s hard not to see a direct impact on the U.S. dollar given Russia’s vast financial surpluses and where those surpluses are deployed”. Or as he sums up: it doesn’t matter who will go down first, everyone will go down either way. In essence, a freeze in banking activity can lead to billions in missed payments, and the inability to receive payments through SWIFT can freeze the flow of goods, services, and commodities like gas or neon, hitting U.S. businesses particularly hard.
And in a snap of fingers, the situation can turn for the worst on the Western side: Now more than ever, we should keep an eye on press releases from the Fed announcing either rate hikes or more liquidity injections. Regardless of what the next move will turn out to be, the outcome is going to be the same: roaring inflation. And when our currency starts to crash down just like the ruble, you can rest assured that bank runs will sweep across America and push financial markets down the abyss."
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