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Russian assets becoming uninvestable as sanctions bite

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LONDON — Following the latest round of international sanctions against Russia over its invasion of Ukraine, Russian assets are becoming “uninvestable,” according to Goldman Sachs.

A key measure aims to freeze the Central Bank of Russia’s roughly $630 billion foreign reserve stockpile, preventing the central bank from buying the Russian ruble currency from Western financial institutions and liquidating assets. This follows measures last week that effectively excluded Russian banks from the Western financial system.

Over the weekend the U.S., European allies and Canada also agreed to cut off key Russian banks from the SWIFT messaging system, which connects more than 11,000 banks and financial institutions in more than 200 jurisdictions.

Fresh U.S. sanctions against Russian banking powerhouses Sberbank and VTB will be enacted on March 26, though many details of fresh sanctions are still to be revealed by various governments.

Kamakshya Trivedi, co-head of foreign exchange, rates and emerging market strategy at Goldman Sachs, told CNBC on Monday that this move would prove the most important to date, as it removes Moscow’s “main and first line of defense” against the depreciation of local assets.

The Russian ruble plunged a further 29% against the dollar early on Monday morning to notch an all-time low before recovering some of its losses by mid-afternoon, while the central bank more than doubled the country’s key interest rate to 20% from 9.5% in a bid to offset the risk of further depreciation and inflation.

Trivedi suggested the currency and other assets would continue to see weakness and volatility.

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“If you think about the annexation of Crimea in 2014 and the whole 2014 to 2015 period – where it was the end of the year, you also had an escalation of violence in the Donbas, big fall in oil prices – there was a decumulation of Russia’s reserves of the order of upwards of $100 billion dollars … and there were very significant interventions on a day-by-day basis in that period,” he said.

Trivedi said these moves highlighted the role that reserves play in stabilizing currencies and noted that even at the time, the ruble saw a significant sell-off.

“So when you fast forward to today, if that main defense mechanism is completely inaccessible or not very accessible to Russian authorities, it’s going to mean much more significant pain and volatility in the local assets, and I think that’s what you are seeing,” he added.

“I think those assets, apart from the technical stance of how people transact in them, are increasingly going to become uninvestable for a lot of global investors.”

With Russian assets under “intense” and “sustained” pressure, he suggested that emerging market countries that are commodity producers and distanced from the immediate “theater of conflict” – such as Latin America and the Gulf – might offer a more attractive medium-term proposition for investors.

However, with much of the detail on the implementation of sanctions still up in the air and some discrepancies between the U.S. and EU in terms of targeted institutions, it might yet be too early to discern the full impact these latest developments will have on the central bank.

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‘Hybrid war’

Former Deputy Chairman of the Central Bank of Russia Sergey Aleksashenko told CNBC on Monday that volatility may be limited until the full extent of the implementation becomes clear, but the new sanctions could grind the central bank to a halt.

“If we believe that the European Union and the U.S. and G-7 members will freeze and block all central bank assets and accounts, that means gold that the central bank has the next day is $135 billion, of physical gold that is kept in Russia, and approximately $60 billion in (Chinese) renminbi, so that’s it,” he said.

“That means no dollars, no euros, while the demand for renminbi in Russia is very small. Moreover, a central bank in this situation will not be able to sell its gold, because no one bank will pay in euros or in dollars, and to sell for renminbi is stupid.”

Such an eventuality would effectively prevent the CBR from carrying out its day-to-day operations, and could be seen as an act of “hybrid war.”

“It was not the United States or the EU which started the war. Russia has started the war against the civilization, against the 21st century, against the whole world,” he said, adding that Russian President Vladimir Putin had for a long time been waging this war until the West was forced to respond with punitive economic measures.

“If Russia wants to use the instruments of the current civilization, if Russia wants to use instruments of the globalized economy, the globalized world – the U.S. dollar, the euro, the British legal system, American legal system, European legal system – Russia should behave itself according to the rules,” Aleksashenko said.

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