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Russia’s main exchange has halted trading in dollars and euros after a sharp escalation in US sanctions targeted the remaining links between the Russian financial system and foreign banks.
Russia’s central bank said exchange rates for the rouble will now reflect interbank transactions, after US sanctions announced on Wednesday on the Moscow Exchange (Moex), Russia’s oldest marketplace, forced trades off the central market.
The changes mean that pricing of the rouble will become more opaque, affecting its convertibility and raising costs for importers and exporters after sweeping sanctions that the US Treasury described as targeting Russia’s “war economy”.
For banks in countries from China to Turkey that are still transacting with Russia, the measures raise the risk that so-called secondary sanctions will cut them off from the US financial system, such as losing access to US dollars.
“Imagine a medieval town where the central market shuts down. There will still be farmers looking to sell food and villagers looking to buy, they just have to meet in some corners all over town,” said Janis Kluge, a senior associate at the German Institute for International and Security Affairs. “This is what is to happen in Russia.”
There was still demand for dollars and euros, Kluge added, but it would be harder for buyers and sellers of foreign currency to find each other, which would make every transaction more expensive and reduce the transparency of the Russian economy.
After the sanctions announcement, some banks offered to sell dollars for Rbs120-200, compared with the most recent Moex rate of just under Rbs90. Currently, most banks are selling the American currency for Rbs93-99. Analysts at Moscow-based BCS Express, one of Russia’s largest brokers, expect the rouble to fall by 3-5 per cent in the coming days compared with pre-sanctions levels.
The spreads between buying and selling prices of the dollar at Sberbank, Russia’s main state-backed lender, more than doubled compared to pre-sanction levels, increasing from nearly Rbs4 to almost Rbs9.5. The spreads for the euro rose from nearly Rbs5 to almost Rbs12.
Russian foreign-exchange brokers, including Finam and BCS, suspended withdrawals from dollar and euro accounts on Thursday, according to their own statements. Shares in Moex itself fell as much as 15 per cent on Thursday before paring losses.
The suspension of exchange-based currency trading does not mean a complete loss of the rouble’s convertibility but is a blow to the Moex, which was formed in 2011 from the merger of Russia’s two leading trade platforms and now has more than 30mn brokerage accounts.
The shift of all dollar and euro trading to the interbank market is likely to result in wider spreads between buying and selling prices and greater rouble volatility. “For ordinary people, this means it will become slightly more difficult to transfer money out of Russia,” said Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center.
It will also impose additional costs on Russian importers, as they need to purchase foreign currency for payments, and will also hit exporters required to convert most of their foreign earnings into roubles.
“The psychological effect of the sanctions on the exchange rate, which is the main indicator of the health of the economy for Russians, should also not be underestimated,” said Kluge.
Russians are accustomed to holding savings in dollars or euros after experiencing the abrupt devaluation of the rouble in the 1990s.
The impact of new sanctions could be mitigated by Russia’s pivot from what it calls “toxic” internationally traded currencies to the renminbi. In May, the Chinese currency accounted for more than 50 per cent of foreign currency trading in Russia, while the share of the dollar and euro fell to about 45 per cent, according to data from the Russian central bank. Additionally, the off-exchange market already accounted for about half of all currency trading volume prior to Washington’s latest sanctions escalation.
However, issues are also emerging with the renminbi. Due to the threat of secondary sanctions, Chinese banks are increasingly reluctant to co-operate with Russian banks and companies, prompting the central bank in May to identify the shortage of renminbi liquidity as a significant risk to the Russian financial system.
