Several governments of the western countries, including the United States and the European Union, have decided to cut ‘selected Russian banks’ from accessing the international payments messaging system, SWIFT. The names of the banks, however, are yet to be released.
The action sent the Russian ruble to a record low of less than 1 U.S. cent in value on Monday. The Russian currency dropped nearly 26 percent to 105.27 per dollar, down from about 84 per dollar late Friday.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is an inter-banking messaging network that is used to send international payment orders within the banking system. It connects more than 11,000 banks globally, out of which over 300 are Russian financial institutions.
The move to disconnect the Russian banks from SWIFT will cut them off from the international banking network, thus crippling their business.
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Sanctioning Russia’s central bank could have a dramatic effect on the Russian economy and its banking system, Elina Ribakova, deputy chief economist for the Institute of International Finance, said before the latest round of penalties was announced. “This would likely lead to massive bank runs and dollarization, with a sharp sell-off, drain on reserves and, possibly, a full-on collapse of Russia’s financial system.
The decline of the ruble would likely send inflation soaring, hurting all Russians and not just the Russian elites who were the targets of earlier sanctions. The resulting economic disruption, if Saturday’s measures are as harsh as described, could leave Putin facing political unrest at home.
However, it’s not clear whether the moves will do much to help Ukraine in the coming days.
Russian President Vladimir Putin’s decision to send troops across the border last week has sent shivers through trading floors as investors fret over the situation in the resource-rich region.
Adding to the unease among investors was news that Putin had put his nuclear forces on a higher alert in reaction to the latest stiff measures.
The decline of the ruble would likely send inflation soaring, hurting all Russians and not just the Russian elites who were the targets of earlier sanctions. The resulting economic disruption, if Saturday’s measures are as harsh as described, could leave Putin facing political unrest at home.
Russia’s central bank announced on Monday it was raising its key interest rate to 20 percent from 9.5 percent in response to SWIFT’s actions.
“The Bank of Russia’s board of directors has decided to raise the key rate to 20 percent,” the central bank said in a statement. The bank said that this would allow it to “support financial and price stability and protect citizens’ savings from depreciation”.
Story compiled with assistance from wire reports
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