Bank Run Russian Style & “Inside Money”

Russia’s Central Bank has upped rates to 20% p.a to cajole depositors to keep their currency in bank coffers, but for many, that offer hasn’t proven quite enticing enough. The last two days have seen long lines for ATMs across the country. Major bank Sberbank has seen a 97% cash outflow from it’s UK listed equity and the Ruble has been butting up against a rate of 1:117 all week.

Twitter #bankrun has been lit up for the second time in as many months after the Canadian crackdown on the bank accounts of those exercising free speech were frozen. Now in Russia we can see lines 100+ deep easily:

Many people believe that bank runs can’t happen in their own country, but the last month has shown that there will be huge numbers of people unprepared for adversity when things go pear-shaped. When people are trying to get out of a system, there is a very small door and a lot of people trying to squeeze through. If you haven’t made it out before the panic, don’t think you will be one of the lucky ones to make it out in the nick of time.

With the Russian Stock Exchange closed for a third day in a row, investors seeking to dump Russian stocks have struggled. Sberbank announced huge profits yesterday of $12.40 billion - a jump of 65% year-on-year,  but warned of ‘abnormal cash outflows’ from their London Stock Exchange dual listing with 97% of it’s value bleeding out in the past fortnight. The bank is closing its European operations to stem the flow.

The Russian Central Bank has called for calm amid fears that the new sanctions could spark a loss of faith in the currency. Rather than listening to the central bankers, anecdotally based on moves in Precious Metals and Bitcoin over the last few days, people in Russia and beyond are seeking to become their own central bank and have money that transcends currencies created and curated by self-interested governments.

We still have the situation where most people don’t understand the concept of fractional banking where banks hold around 10% of what they owe as cash.  It doesn’t take much of a bank run to empty that holding. 

We explained fractional reserve banking, bail-in laws in Australia and why money in the bank is not ‘safe as a bank’ as the old adage goes.  If you haven’t read it already it is a MUST READ. Click here to read.

This is at the personal level but the same is for the sovereign level too.  Bloomberg interviewed Zoltan Pozsar, the global head of short-term interest rate strategy at Credit Suisse AG.  Zoltan “noted that wars tend to turn into major junctures for global currencies, and with Russia losing access to its foreign currency reserves, a message has been sent to all countries that they can’t count on these money stashes to actually be theirs in the event of tension. As such, it may make less and less sense for global reserve managers to hold dollars for safety, given that they could be taken away right when they’re most needed.”

Zoltan talks to ‘different kinds of money’ as it relates to both us mere mortals and our governments and their central banks:

“At issue are the types of money held by governments, which Pozsar divides into two categories: inside money and outside money. Most of the world’s money is inside money, meaning it’s money that you’re owed.  The number you see on your bank account doesn’t represent some kind of cash deposit in a vault somewhere. It’s simply a promise from the bank to you that it will pay you that amount should you need it. The same concept applies at the sovereign scale.

Outside money, on the other hand, isn’t someone else’s liability. For an individual, that could be physical cash or even Bitcoin. For a country, like in Russia’s case, that could be gold. As of January, Russia held over $120 billion worth of gold, more than its actual dollar-denominated holdings. Now, given the loss of access to its dollars and euros, gold is effectively its primary holding. And Pozsar sees a potential for the ruble to become de facto, or literally, backed by gold.”

Nearly 300 years ago Voltaire famously observed “Paper money eventually returns to its intrinsic value… zero.”

This is not gold’s first fiat collapse rodeo…  Here is how gold is going for Russian’s who hold it..,.