Been there, done that: reality bites for Russians as rot sets in for rouble

Russian consumers are more resigned than panicked as they are forced to adapt to a new way of life in an economy the rest of the world is seeking to financially devastate because of President Vladimir Putin’s invasion of Ukraine.

That’s the new reality after a week in which the rouble crashed, inflation and interest rates jumped and foreign suppliers of everything from food to cars vowed to stop doing business in the country. Alongside US and European sanctions, seven of Russia’s biggest lenders are now banned from the SWIFT international messaging system.

Yet many Russians, who have seen numerous bank runs over the past three decades, are for now approaching the descending hardship with fatalism. Capital controls, higher interest rates and other emergency measures already helped slow a bank run that drained about $14bn (about R215bn) in a day.

“As strange as it sounds, in general there’s no panic at stores or ATMs,” said Elmira, 48, who works in education in Ufa in the Urals region. She declined to give her last name.

“There’s clearly no easy solution, but I wasn’t about to run and buy up euros or dollars, or get something just to spend money,” she said.

The resilience of households is crucial for Russia’s $1.5-trillion (about R23-trillion) economy that counts on consumer spending for more than half of all activity.

The central bank has ordered a raft of measures to prevent the bank run, from more than doubling the key interest rate to 20% in an emergency move to freezing local equity trading since Friday. Russia has also temporarily banned foreigners from divesting Russian assets and ordered exporters to sell 80% of their foreign currency earnings. 

Yet the moves come at a price. Russia’s economy could shrink by 3% to 5% assuming energy exports are allowed to continue, according to US-based Citigroup’s Russia economist Ivan Tchakarov. Supply disruptions will have an even bigger impact on inflation than the rouble’s devaluation, he said. 

Russian airlines have been banned from much of European and North American air space, while more than half of its fleet could be grounded as sanctions make leasing planes impossible. Danish shipping giant Maersk this week suspended booking to and from Russia indefinitely, with the exception of food and medical supplies, and warned of delays globally as a consequence of sanctions. 

In the first indication of an inflationary wave set off by the war, weekly price growth nearly doubled to 0.45% in the seven days ending February 25, even before the worst of the sanctions were announced.

Amid the brewing crisis, Volvo, Harley-Davidson and General Motors announced they were halting shipments to Russia. The country’s largest alcohol importer said it would stop deliveries as the rouble crashed. 

With the prospects of imports unclear, X5 Retail Group, the country’s biggest food retailer, said its stores are stocking up to two months worth of buckwheat and other staples in several regions to meet demand. 

The Federal Antimonopoly Service said on Tuesday that several leading grocery stores have agreed to cap price growth at 5% on socially important goods. 

But other costs are soaring. 

“Prices for electronics and most imported goods have increased by 20 to 30% on average since the start of last week,” said Boris Ovchinnikov, co-founder of Russia’s Data Insight. 

Many people’s resigned response is in part due to efforts by the government to assure them its technocrats have the situation under control. Prime minister Mikhail Mishustin said on Tuesday that Russia had been preparing for the threat of sanctions for years.

Russian incomes have already stagnated since 2014, when plunging oil prices and sanctions over the Kremlin’s annexation of Crimea from Ukraine sent the ruble spiraling to record lows. That could mean they have less ability to absorb the shock of the latest wave of inflation. 

Even so, his deputy, Yuri Borisov, said the scale of the sanctions was hard to predict.

Russian incomes have already stagnated since 2014, when plunging oil prices and sanctions over the Kremlin’s annexation of Crimea from Ukraine sent the rouble spiralling to record lows. That could mean they have less ability to absorb the shock of the latest wave of inflation. 

The effects of Friday’s $14bn withdrawal on banks could take time to play out. In Russia’s 2014 rouble crisis, it took weeks before the first large lender collapsed. 

Since then, the central bank, under governor Elvira Nabiullina, spent years eliminating undercapitalised institutions and the sector is better prepared this time around.

Russian banks tapped about $60bn (about R920bn) in repo funding on Tuesday, representing nearly 10% of the nation’s total deposits and highlighting how much pressure liquidity has been under, according to Bloomberg Intelligence’s Tomasz Noetzel.

To prevent the cash drain, Alfa-Bank, Russia’s largest privately owned lender, raised its interest rate for rouble deposits to 20% this week, leading to 100,000 new-term savings accounts in a day totalling more than $850m (about R13bn). It is also offering three-month dollar deposits at an 8% annual rate. Sanctioned VTB Group twice raised deposit rates in the past week. 

“It is not clear at what level this form of pressure on the financial market will end,” Garegin Tosunyan, the head of the Association of Russian Banks, said. “A couple of days of peak panic have passed, but people’s next moves are unpredictable. People have starting thinking long-term, but they cannot forecast anything.”

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— Bloomberg