Ruble collapses as new sanctions hit
Russia's currency collapsed in overnight trading, with the ruble plummeting against the dollar.
Why it matters: The dive shows that the steadily increasing sanctions from the U.S., the European Union and the United Kingdom will inflict massive pain on Russia's economy — the 11th largest on Earth — and its people, in a shock that could reverberate throughout the global financial system.
- The Russian central bank raised interest rates from 9.5% to 20% and announced a raft of measures in response on Monday.
Details: Shortly before midnight in New York, the ruble was down by more than 25% against the dollar, according to data from FactSet.
- Since the start of the year, the currency has fallen more than 40%.
How it works: A blow like this to a country's currency sits somewhere on the line between economic and psychological warfare.
- It threatens to vaporize much of the ruble-based savings sitting in Russia's banks.
- It will send rates of inflation — already high in Russia — sharply higher.
- It drives people to withdraw their cash en masse and quickly try to convert it to more stable currencies, such as the dollar, the euro, gold or even cryptocurrencies. (Runs on ATMs were already starting to happen in Russia over the weekend.)
- It sends interest rates skyward, as global investors pull back in horror at the idea of lending to banks or countries that use a currency that could become worthless.
- High interest rates slam the brakes on the economy, throwing people out of work just as prices soar, a miserable combination of conditions known as stagflation.
What we're watching: An economic shock this large will shake the global markets, probably in unpredictable ways. Investors appear to be bracing by moving out of risky markets to the safety of government bonds.
- Futures markets are pointing to a tumble open once stock trading starts in New York.
- Prices for U.S. Treasury bonds are sharply higher, as investors are rushing to buy what's widely seen as the least risky asset in the world.
Flashback: It's not outside the realm of possibility that some financial player — a hedge fund for example — will not be able to absorb a shock this large. Remember, it was the Russian government's default on its bonds in 1998 that killed hedge fund Long-Term Capital Management and nearly set off a financial crisis.
Editor's note: This article has been updated with details of the Bank of Russia's actions.