Will sanctions knock the wind out of the Russian bear?
Abraham George Market Musings
Markets are very driven by the news that is coming out from the Russian/Ukrainian front. Yesterday, the fireworks were mostly in the financial markets.
The Russian Ruble has started to nosedive with all these international sanctions and the fear that the war may not be going the way Putin expected it to be. Since the start of the conflict, the Ruble has weakened by 61% but during the Crimea crisis in 2014, the damage to the Ruble was around 122%. So, we are still in the early days.
When a combination of capital flight and speculation slams a currency into a downward spiral, the central bank steps in and becomes the buyer of last resort. This is where it can get very tricky. Depending on the severity of the international sanctions and the residents’ lack of faith in their financial system, the central banks can drain their FX reserves very quickly. Over the last 100 years, the Fed (that too with the support of all other major central banks) have warded off the public distrust and fury inflicted on the financial system.
Central banks tend to put on a brave face and can even take protective measures like what the Russian central bank has done now by raising short-term interest rates from 9.5% to 20% making it more difficult to short the Ruble.
But my nearly 47-year experience tells me that no central bank on their own can stave off the global markets to avoid a run on their currency and maintain free markets. Finally, they will resort to capital controls or devalue their currency to a level that the markets will accept.
On 16 Sep 1992 (infamously known as “Black Monday”), a single financier and hedge fund manager George Soros broke the back of Bank of England and forced them to drain their reserves and be forced out of the ERM.
George Soros played the same game with the Bank of Thailand in the late 90s when he tried to force a devaluation of the Thai Baht. The Bank of Thailand was able to chase Soros away by spiking the overnight interest rate but ultimately the Thai authorities did give way to a big currency devaluation.
The Russian Central Bank no doubt has a big war chest of FX reserves. But how good will that be if you cannot access it? The upcoming moves by US and Europe to cripple the Russian economy and force Putin to get into serious dialogue and de-escalation will determine the imminent course of the markets. If Putin remains belligerently intransigent or God forbid turns out to be nuclear (I hope I’ll be wrong on this), then we will be faced with a radically different market.
With a friendly customer (close neighbor) like China, Russia may be able to sell all the oil that they can produce to China. If the West is going to impose more sanctions on Russia, this confrontation can get long-drawn and won’t be short-lived.
With the SWIFT (Society for Worldwide International Financial Telecommunications) sanctions (albeit selective) imposed on Russia, I do not know if a Lehman-type of situation will play out in the markets where institutions do not trust one another forcing the western central banks to open their taps to provide unlimited liquidity in the markets. If it leads to that, we can definitely forget about Fed hikes by mid-March now.
As Lenin once said, “There are decades when nothing can happen and there are weeks where decades can happen”. We are indeed living in interesting times.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is a co-founder of a new hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.