Russian banks face a serious liquidity crisis after invasion of Ukrain

So with Russia intensifying its efforts in Ukraine, the International community realises, they need to put more pressure on the Russian president and one of the ways to do this, is by cutting Russia off from the SWIFT system. This procedure, together with existing problems, is causing a major bank run in Moscow and other parts of Russia and has already resulted in the central bank increasing the cash flow towards the ATMs.

Now the international community, is not yet cutting off the entire Russian financial system, since they are focussing on specific Russian banks and they are freezing the assets of the Russian central bank. Because cutting of the entire Russian financial system, also has major impacts on the rest of Europe. So why is this causing a bank run, by the Russian people and why is this even a problem? Well, for that we have to look at what SWIFT is.

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication and it is used by pretty much every single bank, around the world, to do trillions of dollars in transactions, on a daily basis. It is how banks are able to communicate with each other, so cutting off a specific bank from swift, will make it near impossible for that bank to send or receive payments.

china made CIPS, it is a SWIFT alternative

Now authorities will say, that there are temporary solutions for this, by using the Chinese payment alternatives, set up by China and its allies and while this is true, the Chinese system, is nowhere near as efficient or fast as SWIFT is and will only work for large Russian companies and institutions and not for most small Russian businesses and individuals.

So when you combine the fear of not being able to transfer your money, in or out of your account, with a collapsing Ruble, that is now on the same level as it was during the height of the Covid19 pandemic, in 2020, you get a massive amount of people trying to cashout money out of their banks and into their pockets, since Russia is still a highly cash based economy.

In addition, people cannot use the money on their credit and bank cards due to the departure of major payment providers such as Mastercard, Visa, Google pay and Apple pay. because of these payment processors , credit card payments made it possible to communicate between banks and transfer digital money. However, since they are leaving the country, they cannot use their credit card balances by having their pos devices scanned. In short, the Russian people can neither use nor withdraw the money in their bank accounts. They are restricted from using money from every corner. This is a fact that can seriously shake the Russian economy.

However, the problems are getting even worse, since many Russian are also trying to convert their Rubles into foreign currency, because of the falling price, which is hurting the Ruble even more. It’s also depleting the central bank’s reserves of foreign currency and since the central bank has also been hit by the sanctions, it now has great difficulty with refilling, those reserves.

The value of the Russian ruble against the US dollar. There has been no price change due to the fact that the ruble forex markets have been closed for the last few days. XE

Now some people might say, so what? If everybody is pulling out their own money, what’s the problem? Well, this is where a dirty little secret, known as the bank multiplier comes in. You see, banks will lend out most of the money, that you put in there, to other people and businesses, so they never actually have your money in their accounts, they just pretend to.

They only have around 8 to 12%, of the money they are supposed to have, which means, that if just 8% of the money is being withdrawn, the bank is already having a major liquidity issues and will need to find cash quickly. They will have to get it from other banks, which are also having liquidity issues and the system as a whole, will most likely have to issue a withdrawal stop, to avoid a total collapse.

This will cause even more panic and will most likely lead, to people hoarding their money at home. Now under normal circumstances, the government can calm people down by issuing guarantees to the banks, and slowly let more people withdraw more money, since there is actual liquidity in the system. However, in the case of Russia, it’s caused due to major sanctions from the war with Ukraine, so these problems won’t go away anytime soon, which means that, Russia will have a major problem on its hands, trying to stop a bank run and prevent the Ruble from falling further.