(Reuters) – Washington on Wednesday imposed new sanctions on the Moscow Exchange and its clearing agent National Clearing Center (NCC), leading to an immediate halt to trading in dollars and euros on Russia’s largest exchange.
The US Treasury said it was “targeting the architecture of Russia’s financial system, which has been reoriented to facilitate investment in its defense industry and the acquisition of goods needed for further aggression against Ukraine.”
Russia ignored the move, pointing to the declining role of the dollar and euro after Moscow’s full-scale invasion of Ukraine in February 2022 led to sweeping Western sanctions.
But the US move caught the market by surprise and it could take days, if not weeks, to adjust to the new reality.
TRADE STOP
The Central Bank announced that trading in dollars, euros and Hong Kong dollars on the Moscow Exchange will stop. Sanctions, in particular the inclusion of NCC, do not allow traders to settle spot and futures contracts in dollars through the Moscow Exchange infrastructure.
“Sanctions have been imposed only by the United States, but the EU countries are also complying with them,” the central bank said. “Therefore, exchange trading in the euro was stopped.”
The Moscow Exchange is likely to see a decline in trading volumes, which could lead to a reduction in its profits. Its shares fell 15% at the Moscow market open and then fell about 4.8%.
The fact that at the beginning of the banking day there was no clear indicator of the ruble/dollar exchange rate suggests that the Russian financial system was not 100% ready for this step, says Evgeniy Nadorshin, chief economist at PF Capital.
SILVER OVERLAYS
It is important to note that about 60% of foreign exchange trading in Moscow now takes place over the counter (OTC). The Central Bank said it would calculate the official ruble exchange rate based on over-the-counter trading.
Since the start of settlements in this way, the bank has observed only “minor deviations” from the official exchange rates of the dollar and the euro.
The exchange rate will remain the market rate – only the data used to calculate it has changed.
Another benefit for Russia is that growing trade with China as Moscow redirects trade flows east has made the yuan the most traded currency in Moscow, with 54% of the market in May, down from a minuscule pre-war share.
“To determine a fair exchange rate, market participants will be able to rely on the ruble-yuan, yuan-dollar and yuan-euro cross rates,” Alfa Capital said.
RUBLE PERSPECTIVE
Short-term volatility is inevitable, but in the medium term the ruble may strengthen. When payment difficulties hampered imports earlier this year, the ruble strengthened, Raiffeisen Bank analysts said.
“In the longer term, the ruble may even strengthen. Since it will become more difficult to withdraw foreign currency… this may reduce demand for it,” Alfa Capital said.
“Let’s remember 2022: the ruble initially weakened greatly due to panic in the market, but then began to strengthen.”
The Central Bank stated that the ruble exchange rate is determined by the balance of supply and demand for foreign currency received from foreign trade activities, and does not depend on the method of conducting transactions.
Russian exporters, who are required to sell part of their foreign currency earnings as part of capital controls backing the ruble, will continue to do so in dollars directly through authorized banks, the central bank said.
WIDE SPREADS, OTHER RISKS
Brokers offered wide buy-sell spreads, and many did not conduct transactions at all, which is another evidence of the general unpreparedness of the market for sanctions.
“In the future, the difference between the buying and selling rates of the US dollar and the euro will be greater than before, but the emergence of additional transaction costs and more difficult access to the purchase of major global currencies will limit domestic demand for foreign assets to some extent,” he said. stated Oleg Kuzmin and Andrey Melashchenko from Renaissance Capital.
Washington has made clear its intention to crack down on banks in third countries that allow Russia to support its war efforts.
“The new restrictions increase the level of risk in terms of possible secondary sanctions,” Alfa Bank said.