US Sanctions Force Moscow Exchange to Halt Dollar and Euro Trading, Shift Focus to Yuan

Feature and Cover US Sanctions Force Moscow Exchange to Halt Dollar and Euro Trading Shift Focus to Yuan

New US sanctions against Russia have resulted in the immediate halt of trading in dollars and euros on the Moscow Exchange (MOEX), the primary financial marketplace in the country.

On Wednesday, despite being a public holiday in Russia, both MOEX and the Russian central bank swiftly issued statements following the announcement of the new sanctions by Washington. These sanctions aim to curb the flow of money and goods supporting Moscow’s military actions in Ukraine.

The central bank stated, “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.”

As a consequence, banks, companies, and investors will no longer be able to trade these currencies through the central exchange, which provides benefits such as enhanced liquidity and oversight. Instead, trades will now have to be conducted over the counter, where transactions occur directly between two parties. The central bank mentioned it would use data from these trades to establish official exchange rates.

Many Russians maintain savings in dollars or euros, considering past economic crises when the ruble’s value plummeted. The central bank assured citizens that their deposits were safe. “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,” it reassured.

An individual from a significant, non-sanctioned Russian commodities exporter commented to Reuters, “We don’t care, we have yuan. Getting dollars and euros in Russia is practically impossible.”

With Moscow seeking to enhance trade and political relationships with Beijing, the Chinese yuan has overtaken the dollar as the most traded currency on MOEX, making up 53.6% of all foreign currency transactions in May.

Typically, the dollar-ruble trading volume on MOEX is around 1 billion rubles ($11 million) daily, while euro-ruble trading volume is approximately 300 million rubles ($3 million) each day. In contrast, yuan-ruble trading volumes now frequently exceed 8 billion rubles ($90 million) daily.

Dollar rates have surged

Before the national holiday, the ruble closed at 89.10 to the dollar and 95.62 against the euro. Following the sanctions announcement, some banks rapidly increased their dollar rates.

Norvik Bank announced Wednesday that it was buying dollars for just 50 rubles but selling them for 200 rubles, although it later adjusted the rates to 88.20/97.80. Tsifra Bank was buying dollars at 89 rubles and selling them at 120.

The US Treasury declared it was “targeting the architecture of Russia’s financial system, which has been reoriented to facilitate investment into its defense industry and acquisition of goods needed to further its aggression against Ukraine.”

Russia’s central bank has been preparing for such sanctions for nearly two years. In July 2022, the bank stated it was modeling different sanctions scenarios with participants of the foreign exchange market and infrastructure organizations.

Russian broker T-Investments remarked on Telegram, “This is bad but expected news.”

Forbes Russia reported in 2022 that the central bank was considering a mechanism for managing the ruble-dollar exchange rate should exchange trading be stopped due to sanctions against MOEX and its National Clearing Centre, which was also affected by the new sanctions.

MOEX announced that share trading and money market trades settled in dollars and euros would also be suspended. The money market includes low-risk, short-term debt instruments like government bonds and commercial debt.

These recent developments underscore the significant impact of the latest US sanctions on Russia’s financial operations. The shift from central exchange trading to over-the-counter deals marks a substantial change in how financial transactions will be conducted in Russia. The central bank’s reassurance about the safety of deposits in dollars and euros aims to maintain public confidence, although the actual ability to trade these currencies has been drastically reduced.

The response from market participants, such as the adjustment of dollar rates by various banks, reflects the immediate economic adjustments being made in light of the new sanctions. The increased reliance on the yuan and the continued preparation by the Russian central bank highlight the ongoing strategic shift in Russia’s financial practices to mitigate the impact of Western sanctions.

As Russia deepens its financial and trade ties with China, the prominence of the yuan in the Russian financial market is likely to grow further. This realignment not only reflects the current geopolitical tensions but also suggests a long-term shift in the global financial landscape, with significant implications for international trade and currency markets.

The central bank’s proactive stance in simulating sanctions scenarios and developing contingency plans demonstrates a level of preparedness, although the full impact of these new sanctions will unfold over time. Market participants and the general public will closely watch the developments as Russia navigates through these challenging economic conditions.

Overall, the suspension of dollar and euro trading on the Moscow Exchange marks a pivotal moment in Russia’s financial sector, driven by geopolitical dynamics and strategic economic adjustments. The move to over-the-counter trading, the reliance on the yuan, and the central bank’s assurances are all part of a broader strategy to stabilize the Russian economy amidst increasing international pressure. The effectiveness of these measures and their impact on the Russian financial system and broader economy will be critical areas to monitor in the coming months.

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