The ruble is so vulnerable it's only a question of how much damage we want to do [View all]

[BeyondGeography]

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In countries like Russia, where the currency is not so stable, the ability to convert to a strong and trusted one like the dollar or the euro is crucial. It is evidence that the home currency — in this case the Russian ruble — has value. Russia’s vast store of foreign exchange backs up that value. It assures households and businesses that they can convert their rubles whenever they want, and makes sure that the nation can protect its exchange rate with other currencies.. The reserves also lubricate the day-to-day transactions of Russian businesses that export and import.

But once workers and managers, owners and financiers worry that they can’t trade their rubles for dollars or euros — because banks won’t be able to access their foreign exchange reserves — they lose confidence. The Bank of Russia can try to prop up the value of the ruble by using its reserves to buy up rubles that people are selling. But it can only do that as long as it has access to foreign reserves.

The question is how long it can make those transactions. According to Mr. Bernstam’s calculations, Russian individuals and companies have deposited $268 billion in foreign denominations in Russian banks.

Yet the central bank has just about $12 billion of cash in hand — an astonishingly small amount, he said. As for the rest of Russia’s foreign exchange reserves, roughly $400 billion is invested in assets held outside the country. Another $84 billion is invested in Chinese bonds and $139 billion is in gold. The central bank could trade in some of those bonds for renminbi, which would enable it to buy goods from China, but not from other countries. It could also sell gold, although Mr. Bernstam argues that there will be few buyers for the massive tons that Russia has on hand.

Other estimates put the amount of assets held outside Russia closer to $300 billion. The potentially dire consequences for the economy are the same.

“If the ruble collapses, it could usher in severe inflation and exacerbate a brewing recession,” Robert Person, an associate professor of international relations at the United States Military Academy, said, noting that his views were his own and not those of the government or military. The economic consequences of these measures could turn out to be far more severe than other measures that have gotten more attention in the media,” he added. “This gets at the Russian government’s basic tools to manage its macroeconomy.”

https://www.nytimes.com/2022/02/28/business/russia-sanctions-central-bank-ruble.html