Russia’s main exchange said it would halt trading in the U.S. dollar and euro after President Joe Biden’s administration rolled out a series of measures aimed at further isolating Moscow from the international financial system over the war in Ukraine.
The Moscow Exchange suspended trading on foreign exchange, precious metals, stocks, currencies and standardized over-the-counter derivatives markets settled in the U.S. dollar and the European single currency from Thursday. The company, Moex, joins the country’s main settlement depository in being targeted by U.S. restrictions announced late Wednesday.
Moscow’s MOEX Russia index opened down 4% on Thursday.
The move sparked confusion in markets over the consequences of the sanctions. These changes may result in increased costs for market participants due to increased commissions, wider bid-ask spreads and adverse exchange rate fluctuations.
Any settlement and foreign trade operations with foreign counterparts may be negatively affected, and the restrictions may also have an impact on yuan trading, which currently accounts for more than half of foreign exchange transactions.
Russian authorities are trying to ditch the dollar and euro, labeling them “toxic” currencies amid sanctions over President Vladimir Putin’s February 2022 invasion of Ukraine. The yuan’s share of trade has increased, while officials have also taken steps to prevent businesses and people from using the currencies of countries that impose restrictions.
“Individual dollar and euro transactions have been severely restricted for quite some time,” said Sofya Donets, an economist at Tinkoff Investments. “For ordinary Russians, not much will change. “
“What will not change is the continued strengthening of the renminbi’s role in Russia,” Donets said. She said that although there are concerns that settlements involving the yuan may be affected, the purpose of the sanctions is not to restrict the use of the yuan.
The Bank of Russia said in a statement that transactions in U.S. dollars and euros can still be conducted on the over-the-counter market. The regulator said it would use bank and over-the-counter trading data to determine the ruble’s exchange rate against those currencies.
The central bank also postponed the start of trading in foreign exchange and precious metals markets on Thursday from 6:50 a.m. Moscow time to 9:50 a.m.
What does Bloomberg Economics say…
“An escalation of sanctions would destabilize currency markets and divert funds to unsanctioned private banks. The next step in the escalation could be the imposition of secondary sanctions on foreign banks that would facilitate reconciliation. Alexander Isakov, Russian Economics Home.
Daily transactions in U.S. dollars began in Russia more than three decades ago. Data from the Russian Central Bank showed that in May, the share of currencies classified as toxic by Russia, such as the U.S. dollar and the euro, fell to 45.9% of foreign currency trading on exchanges, while the share of the yuan rose to a record 53.6%.
“Companies and individuals can continue to buy and sell dollars and euros through the Bank of Russia,” the central bank said, adding that all funds in accounts and deposits denominated in these currencies “will remain safe.”
Russia has stopped using Western currencies since sanctions were first imposed over the 2014 annexation of Crimea, which could limit the disruption from U.S. punitive measures.
“In general, it is believed that the main costs are related to the lack of information on exchange rates and flows, but not to currency shortages,” said Yevgeny Koshelev, an analyst at the Bank of Russia. “The costs for exporters of alternative switching channels are not small, but , but is relatively fixed for importers, it may increase initially and then potentially return to the previous level.
Russia’s central bank has been preparing for possible sanctions on the country’s only foreign exchange clearing house since last year. To avoid a collapse in settlements, regulators developed additional mechanisms to determine the official exchange rate without data from the Moscow Exchange.
“The biggest impact is on the Moscow Exchange itself,” Donets said. “Even so, it doesn’t matter.”
