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“Explore the impact of new US sanctions on Russia’s financial markets as dollar and euro trading on the Moscow Exchange (MOEX) is halted. Learn about the implications for Russian banks, companies, and investors, and how the central bank and businesses are adapting to these changes
New US Sanctions Force End of Dollar and Euro Trading on Russia’s Main Exchange
In a significant escalation of economic pressure, new US sanctions against Russia have led to the immediate suspension of trading in dollars and euros on the Moscow Exchange (MOEX), the country’s primary financial marketplace. This move marks a critical juncture in the ongoing economic confrontation between the West and Russia, primarily driven by Moscow’s ongoing war in Ukraine.
Immediate Impact and Official Responses
Moscow Exchange and Central Bank Statements
On a public holiday in Russia, both MOEX and the Russian central bank swiftly issued statements following Washington’s announcement of the new sanctions. The central bank confirmed that due to these restrictive measures, the exchange trading and settlements of deliverable instruments in US dollars and euros were suspended.
“Due to the introduction of restrictive measures by the United States against the Moscow Exchange Group, exchange trading and settlements of deliverable instruments in US dollars and euros are suspended,” the central bank stated.
The suspension of dollar and euro trading on MOEX means that banks, companies, and investors can no longer trade these currencies via a central exchange. This central exchange offers advantages such as better liquidity and oversight, making its loss a significant blow to the Russian financial system.
Shift to Over-the-Counter Trading
With the central exchange no longer an option, trading in dollars and euros will have to be conducted over the counter, where deals are made directly between two parties. The central bank has assured that it will use data from these over-the-counter trades to set official exchange rates, but the change represents a step backward in terms of market efficiency and transparency.
Despite the abrupt changes, the central bank sought to reassure Russians who hold savings in dollars or euros that their deposits remain secure.
“Companies and individuals can continue to buy and sell US dollars and euros through Russian banks. All funds in US dollars and euros in the accounts and deposits of citizens and companies remain safe,” the central bank reassured.
Adaptation to New Realities
The sanctions have forced Russian financial institutions and businesses to adapt quickly. A representative from a large, non-sanctioned Russian commodities exporter expressed a lack of concern over the changes, citing a shift towards using the Chinese yuan.
“We don’t care, we have yuan. Getting dollars and euros in Russia is practically impossible,” they said.
This sentiment reflects a broader trend in Russia’s financial dealings. With Moscow strengthening trade and political ties with Beijing, the yuan has overtaken the dollar as the most traded currency on MOEX, accounting for 53.6% of all foreign currency traded in May.
Currency Trading Volumes and Market Reactions
Trading Volumes on MOEX
Before the sanctions, dollar-ruble trading volume on MOEX typically hovered around 1 billion rubles ($11 million) per day, while euro-ruble trading was about 300 million rubles ($3 million) daily. In contrast, daily trading volumes for yuan-ruble regularly exceeded 8 billion rubles ($90 million), underscoring the yuan’s growing prominence in Russian financial markets.
Fluctuations in Exchange Rates
The sanctions have already caused significant fluctuations in exchange rates. On the eve of the national holiday, the ruble closed at 89.10 to the dollar and at 95.62 against the euro. However, following the sanctions news, banks rapidly adjusted their dollar rates.
For example, Norvik Bank initially offered to buy dollars for just 50 rubles but sell them for 200 rubles, though it later adjusted these rates to 88.20/97.80. Similarly, Tsifra Bank was buying dollars at 89 rubles and selling them at 120 rubles.
Strategic and Long-Term Implications
Targeting Russia’s Financial System
The US Treasury has stated that the sanctions are specifically aimed at the architecture of Russia’s financial system, which has been reoriented to support investments into its defense industry and acquire goods necessary for its aggression against Ukraine.
“This is bad but expected news,” Russian broker T-Investments remarked on Telegram, reflecting the general sentiment among financial professionals who had been anticipating such developments.
Preparedness for Sanctions
The Russian central bank has been preparing for such sanctions for around two years. In July 2022, the bank indicated that it was modeling various sanctions scenarios with foreign exchange market participants and infrastructure organizations. This preparation included discussions on mechanisms for managing the ruble-dollar exchange rate should exchange trading be halted due to sanctions against MOEX and its National Clearing Centre, which was also targeted by the new sanctions.
Broader Economic Impact
The suspension of dollar and euro trading on MOEX also means that share trading and money market trades settled in these currencies will cease. The money market, comprising low-risk, short-term debt instruments like government bonds and commercial debt, is crucial for maintaining liquidity and stability in the financial system. The cessation of these trades could lead to significant disruptions in the financial markets.
Conclusion
The latest round of US sanctions against Russia represents a profound shift in the ongoing economic conflict between the two nations. By targeting the Moscow Exchange and suspending dollar and euro trading, the sanctions aim to cripple Russia’s financial infrastructure and limit its ability to sustain its military activities in Ukraine.
While the immediate impacts are severe, with significant disruptions in currency trading and fluctuations in exchange rates, the long-term implications could be even more profound. Russia’s increasing reliance on the yuan and its efforts to reorient its financial system towards non-Western currencies are indicative of a broader strategic shift.
As both sides continue to adapt to the new realities of this economic confrontation, the future of global financial markets remains uncertain. The ability of Russia to withstand these pressures and the effectiveness of the sanctions in achieving their intended goals will be critical factors to watch in the coming months.
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