Pro Perspectives 2/28/22

February 28, 2022

Let's take a look at the fireworks in Russian financial markets today …
Below is a chart of the U.S. dollar vs. the Russian ruble.  This is conventional way in it's quoted in the foreign exchange market (rubles per dollar).  The orange line rising represents appreciation in the dollar/depreciation in the ruble. 

Now, the white boxes in this chart above represent the start/end of the Russia/Ukraine conflict in 2014, and the start (November) of the latest conflict, to present, in the far right box.  
Observation:  If we look back at 2014, when Russia ultimately annexed Crimea, the damage to the Ruble was worse — about twice as bad as the current case (thus far).  But it's early.
When the currency is collapsing (from a combination of capital flight and speculation), the central bank has to step in and become the buyer of last resort (defend the currency).  But to buy rubles, the Central Bank of Russia has to exchange foreign currency, from their reserves.   This is where it becomes dangerous for Russia.  When the central bank is selling dollars and buying its own currency all day, every day to fend off speculators it can quickly bleed the country's currency reserves (a component of the country's global net worth). 
With the above in mind, Russia ratcheted up short term interest rates today from 8.5% to 20%!  
For any speculators now trying to short the ruble, they now have to pay an overnight interest rate of 20%.  That will end a speculative rout quickly.  That's precisely what the Bank of Thailand did to George Soros back in the late 90s, when he was trying to force a devaluation of the Thai baht.  They chased him away by spiking the overnight interest rate. But they ultimately did give way to a big currency devaluation.
Thus far, the Russian central bank comes into this crisis with a larger war chest of foreign currency reserves (as you can see in the above chart) … and a customer, in China, that will probably be happy to buy all of the oil Russia will sell them (if the West were to go farther down the road of sanctions). 
So, this confrontation building between Russia and the West probably won't be short-lived.