Ruble is crashing as new sanctions take effect

 

The currency of Russia sank overnight during trading as the ruble plunged in value against dollars.

Significance? The dive reveals that the ever-increasing number of restrictions of the U.S., the European Union and the United Kingdom will be a huge blow to Russia's economy -- which is the 11th largest in the world -- and its citizens and its people, causing an event that could ripple throughout the world financial system.

• The Russian central bank increased its interest rates from 9.5 percent to 20%, and announced a variety of actions in response on Monday.

Information: Shortly before midnight in New York the ruble was down more than 25 percent against the dollar according to figures from Fact Set
.

• Since the beginning of the year, the value of the dollar has fallen by more than 40%..

How does it work A hit such as this on a nation's currency is somewhere along the border between psychological and economic combat.

• It is threatening to wipe out much of the savings based on rubles in Russian banks.
• This will push the rates of inflation that are already high in Russia to a new high.
• This causes people to take out their cash in large quantities and then quickly attempt to convert it into more secure currencies, such as the euro, the dollar or cryptocurrency currencies. ( Runs on ATMs are already getting underway in Russia this weekend.)
• The rate of interest is soaring as investors across the globe are spooked by the thought that banks can lend money to other countries who use currencies that may become unusable.
• The high interest rates put the economic brakes forcing people out of work when prices rise and prices rise, a terrible combination of circumstances referred to as the stagflation.

Our thoughts:I feel real sympathy for Russian people who have to cope with this. They're suffering from an act of a dictator who is beyond their control.

What's on our radar: An economic shock that this magnitude will shake global markets, possibly in unpredictably ways. Investors seem to be preparing by shifting away from market risk and into the security of bonds issued by government.

• Futures markets point to the possibility of a fall in prices once trading begins from New York.
• The prices of U.S. Treasury bonds are significantly higher because investors are rushing to purchase what's generally regarded as the safest investment on the planet.

Flashback The possibility is not out of the the possibility that a financial institution like an investment fund for instance is not in a position to take on an event this massive. Remember that this was Russian state's bankruptcy in its 1998 bonds that destroyed the hedge fund Long-Term Capital Management and nearly triggered an economic crisis.