Column: Russian central bank sanctions and ruble plunge, composition of a big blow to Japanese companies

[Tokyo 4th Reuters] --Due to Russia's invasion of Ukraine, Russia's exclusion of banks from the network of the International Interbank Communications Association (SWIFT) is drawing attention as a result of sanctions against Russia by Western countries such as the seven major countries (G7). However, sanctions have been put in place that would cause greater damage to Russia. It is a sanction for the Russian central bank. The sanctions made it impossible to buy dollars to defend the ruble, making it impossible to see how far the ruble would fall.

As a result, US, European and Japanese companies operating in Russia are at increased risk of suffering such great damage that ruble-denominated trade receivables are nearly worthless. The real reason why US and European companies have decided to withdraw from Russian business ahead of Japanese companies is probably the "ruble plunge." Japanese companies, including automobiles and trading companies, are also forced to make a "decision" because some companies have expanded production facilities in Russia and have a large amount of exposure. The blow is expected to be widespread, and the Japanese government is expected to face a situation where it cannot be on the sidelines as a "private business problem."

The ruble plunged to 118.35 rubles at a temporary rate against the dollar on the 3rd. This is about 30% down from just before Russia's invasion of Ukraine and about 60% down from the beginning of January this year.

Normally, the Russian central bank would intervene to sell dollars / buy rubles to stop the crash, but this time it cannot. This is because the US and other Western countries have sanctioned the Russian Central Bank, and Russia's foreign exchange reserves held by the NY Central Bank, European Central Bank (ECB), and the Bank of Japan have been frozen and cannot be used. Chief Cabinet Secretary Hirokazu Matsuno announced at a press conference that the Bank of Japan has about 3.8 trillion yen held by the Russian central bank.

Currencies that cannot intervene are more likely to be "sold" in the market. Also, on the 4th, Ukrainian Foreign Minister Kreva tweeted that a fire broke out at the Zaporizhia nuclear power plant in the country due to a total attack by Russian troops. Risk-off transactions once surfaced in the global financial and capital markets, and the ruble was expected to depreciate further.

This "ruble crash crisis" could have a major impact on the management of Western companies. Even if you export products such as automobiles, personal computers, and semiconductors to Russia and receive the price in rubles, if the rubles are plummeting, you will end up in a big deficit when you convert to your own currency.

In addition, even if a local subsidiary in Russia receives the price sold in Russia in rubles and pays raw material costs in dollars or euros, the more the rubles are sold, the more deficits will be accumulated due to the collapse of the rubles.

In fact, Western automakers have announced early reviews of their Russian business. GM announced on February 28 that it will suspend all automobile exports to Russia for the time being. Volvo of Sweden also said that it would stop exporting cars to Russia for the time being. Volkswagen (VW) of Germany has suspended car shipments to dealers in Russia, and Daimler Truck has announced that it will immediately freeze its business activities in Russia.

"Our thoughts are with Ukraine. The loss of life is a tragedy, and our greatest concern is the security of the Ukrainian people," GM said in a statement. The humanitarian point of view seems to be an example of an "ethical economy" that has a great influence on an important part of business decisions, but I would like to point out that the "Abacus account" that attempts to minimize the loss caused by the collapse of the ruble also worked.

On the other hand, Japanese companies announced on the 3rd that Toyota Motor will suspend automobile production and import of finished cars in Russia for the time being from the 4th. He cited it because the logistics were disrupted and the supply of parts from outside Russia was stagnant. Nissan Motor Co., Ltd. announced on the 3rd that it has stopped exporting finished vehicles to Russia. Honda has suspended exports of four-wheeled vehicles and two-wheeled vehicles. All of them are based on the fact that production cannot be performed normally due to the disruption of the distribution network in Russia, but as a result, it is possible to avoid the "loss" caused by the collapse of the ruble.

The question is whether the ruble's decline will converge in a short period of time or will it be prolonged. If Russia's invasion of Ukraine is resolved in a short period of time and sanctions on the Russian central bank are lifted, the ruble will recover its level in a short period of time and minimize the impact on US, European and Japanese companies. Can be done.

However, sanctions on the Russian central bank are unlikely to be lifted unless the war is prolonged or Russia withdraws from Ukraine at the request of Western nations.

President Putin is said to have emphasized the policy of seeking "neutralization" and "demilitarization" of Ukraine in a telephone talk with French President Emmanuel Macron on the 3rd, and there is no prospect of short-term convergence.

If sanctions on the Russian central bank continue for a long period of more than a year, manufacturers with equipment such as factories in Russia are waiting for the worst scenario of abandoning the equipment. This is because there is no place to buy equipment under the situation where the ruble is falling. Even Chinese companies, which are friendly to Russia, will not pay a fortune for projects where foreign exchange losses are inevitable.

Japanese companies operating in Russia are not limited to automobile manufacturers and trading companies, but span a wide range of industries. The largest number of cases in which a large number of companies suffer a large amount of foreign exchange loss due to the effects of the war may be the largest after World War II. In "peacetime", it is a general principle that companies take risks themselves, but in "wartime", the situation may be different. The author wants to point out that the government needs to promptly put together measures for temporary measures such as bridge loans from government-affiliated financial institutions.

Another big problem may emerge. It is an increase in credit risk over European banks, which have significant exposure to Russia. It is expected that some European banks will increase their credit risk if the SWIFT disconnection problem causes their loans to Russia to become non-performing loans and the ruble plunges.

In that case, it cannot be said that there is no impact on Japanese banks. The spread of credit crunches from Europe to the United States and Japan is also likely to become a reality as the situation prolongs.

Especially in Japan, as the fiscal year end of March is approaching, many companies, including major banks, are paying close attention to trends in international credit costs. There is likely to be a global shortage of dollar funds, and the government and the Bank of Japan are now required to make careful preparations to prevent the recurrence of the 2008 global financial crisis (Lehman shock).

● Background news

・ [Information BOX] Ukraine crisis affects Russian business of Japanese companies

* Content such as news, transaction prices, data and other information in this document is provided by Reuters columnists for your personal use only and is provided for commercial purposes only. It's not a thing. This content in this document is not intended to solicit or induce investment activity and is not appropriate for use in making decisions when trading or buying or selling this content. This content does not provide any investment, tax, legal or other advice as investment advice, nor does it make any recommendations regarding specific financial individual stocks, financial investments or financial products. The use of this document does not replace the investment advice of qualified investment professionals. Reuters makes reasonable efforts to ensure the reliability of the Content, but any views or opinions provided by the columnist are the columnist's own views or analysis, not the views or analysis of Reuters.

Our Code of Conduct: Thomson Reuters "Principles of Trust"