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Ruble falls by 30%. Five other ways US, UK sanctions are hitting Russia, as Ukraine war rages

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Russia’s currency, Ruble, fell 30% on Monday, after series of sanctions – including the SWIFT cut off – by the European Union and the United States over the weekend, kicked in, causing panic among Russians.

The sanctions were made following Russia’s invasion of Ukraine a week ago, which has led to a war between the two countries that were previously under one nation, Soviet Union.

What are the sanctions EU, US made against Russia?

SWIFT disconnection: Over the weekend, EU and the US had agreed to pull Russia’s connection to the SWIFT (Society for Worldwide Interbank Financial Telecommunication), which is a global financial channel used for rapid transfer of money across borders.

SWIFT is used by 11,000 banks and financial institutions in more than 200 countries. With the disconnection of Russia, the country will be unable to carry out transactions across the oceans with trade partners on oil and gas exports.

Foreign reserves frozen: The UK, US and other allies of Ukraine had also froze the assets of Russian banks, preventing Vladimir Putin’s government from accessing the whole $630 billion foreign reserves the country owns.

This reserve is the highest Russia has ever garnered in years, and it is believed to be a useful tool for Putin to withstand the SWIFT disconnection, but that has now received a blow.

US, EU to close airspace to Russia: Aside from isolating Russia from the international financial system and preventing them from acquiring necessary resources and tools to maintain financial stability, airspace are also being closed to Russian planes.

Reason the United States, UK, Canada and other allies are informing their citizens to leave the country before the airspace closure becomes effective – no date has been officially released.

How the EU, US sanctions affects Russia?

Ruble crashing: It weakens Russia’s attempt to ensure the operational continuity of its financial sector, and this reflects on the Ruble which fell 30%, as it traded at $119.50, weakening the Russian currency.

This is expected to cause a significant rise in inflation, forcing Russians to dump their currency for dollar to hedge the inflation.

And this has led to long queues in Putin’s country, with fear that banks, at some points, will prevent them from withdrawing their money, to save Russia’s banking system from collapsing.

Cost of living rising in Russia: Russia’s economy will suffer from high inflation, as the country’s currency will be less valuable to buy goods and services, reflecting an increase in cost of living.

READ ALSO: Currency in circulation hits all time high, as CBN pushes N418bn into economy

This will depreciate the purchasing power of Russians, knocking the turnover of companies down, and resulting to little contributions to the economy from households and businesses.

Interest rate surges: In response to the weakening of ruble and inflation hike, amid the sanctions induced by the Ukraine invasion, Russia raised interest rate to 20% from 9.5%.

It is “designed to offset increased risk of ruble depreciation and inflation.” the central bank in Russia said about the more than double interest rate hike in a report by CNBC on Monday.

Russia unable to defend Ruble: Russia’s inability to access some of its $630 billion overseas reserves makes it difficult for the country’s central bank to have forex to defend the depreciating Ruble and control inflation.

This will lead to domestic exporters losing 80% of their forex revenues to Russia’s government starting on Monday, February 28, as the country’s finance ministry and the central bank plan to order the exporters to sell their foreign exchange revenues received under export contracts.

Foreign reserves sources blocked: With some banks’ asset frozen, limiting forex availability, the aviation industry could have pumped the foreign reserves, but European countries and US are closing their airspace to Russia.

The aviation industry is a source for forex for countries, but with no US or EU planes heading to Russia soon, there won’t be dollar, euro or pounds available for Putin’s government to trade, neither will his administration be able to trade oil and gas smoothly with the disconnection of SWIFT.

Investors investment down: Investors who invested in Russia’s securities are finding it difficult to withdraw their investment, as the central bank has paused exit of funds.

This is meant to prevent panic in the securities market, and such action will discourage investment inflow in Ruble or bonds traded by the Russian government.

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