How war and sanctions are making the ruble harder to trade

The explosion of sanctions against Russia following its invasion of Ukraine sent its currency plunging, separating the prices of rubles traded in Russia from those quoted abroad by international banks. When trading in Moscow resumed, it was clear that the currency had indeed devalued by 25% or more, its biggest drop since Russia’s annexation of Crimea in 2014. This was followed by a meteoric return to pre-invasion levels as Russia forced buyers to pay in rubles for its oil and gas. Some currency strategists say the market is still broken due to capital controls, dollar hard sells and ultra-light volumes.

1. Where and how is the ruble traded?

Before the war, the ruble was traded around the clock on the interbank market. It also changed hands on the Moscow Stock Exchange between 7 a.m. local time and 11:50 p.m., one of the longest trading days in the world and coinciding with the most active phase of the foreign exchange market, when London and New York are both open. These hours were temporarily shortened between 10 a.m. and 7 p.m. in early March. Trading volumes fell to their lowest level in a decade, based on the 20-day moving average.

2. Why is the ruble traded on the Moscow Stock Exchange?

While currency trading is primarily an over-the-counter transaction globally, the ruble was largely traded on the Moscow Stock Exchange, both in the spot and futures markets. There are historical reasons for this. When the Soviet Union collapsed, it was necessary to establish a market rate for the ruble against the dollar, and the Moscow Interbank Currency Exchange was created for this purpose. Over time, the exchange grew to offer trading in stocks and other securities, but remained a hub for currency trading. In 2011, it merged with the Russian trading system to form the Moscow Stock Exchange, which carried on the legacy.

3. What happened to onshore and offshore markets?

When the war broke out, the offshore market reacted quickly to the prospect of Russia’s isolation from global financial markets and traders drove the ruble down. But on the Moscow Stock Exchange, the reaction came more slowly, in several stages. The exchange eventually allowed the ruble to find its level in the onshore market as well, but for some time there was a discrepancy of up to 15% between the Moscow rate and the offshore rate. The gap has since narrowed. The ruble is not the only currency with two courses. The Chinese yuan has an onshore and offshore rate, and a gap persists between the two due to transaction costs and ease.

4. Is this the end of free ruble trade?

As it stands, traders no longer regard the ruble as a free-trade currency. Capital controls imposed as a result of Western sanctions mean that the exchange rate is effectively managed. Russia has forced exporters to sell currency and also requires its natural gas to be paid for in rubles. Many exchange shops have stopped trading the ruble on the grounds that its value displayed on monitors is not the price at which it can be exchanged in the real world. This ends its free float since 2014, unless Russia’s international isolation ends and the country allows purely market-based pricing again. Russians initially lined up at ATMs across the country to withdraw foreign currency, but the panic has died down since the ruble stabilized. Strategists say the ruble rally is not credible and the currency would trade at a very different level if the artificial barriers were removed.

5. How has the ruble been historically supported?

Prior to 2014, the Bank of Russia defended the ruble using a trade corridor measured against a basket of dollars and euros. However, he pledged to move away from exchange rate targeting and instead aim for inflation, widening the range several times before abandoning it altogether. Since then, the central bank has only retained intervention as a means of supporting the currency in times of volatility, through sales and purchases of currencies.

6. Has the central bank entered the market this time?

Since the imposition of sanctions following the invasion, the central bank can no longer intervene in the foreign exchange market because a large part of its reserves is blocked. On February 24, the day the invasion began, the Bank of Russia intervened for the first time in years as part of a series of measures aimed at stabilizing the Russian financial system. Governor Elvira Nabiullina said he spent $1 billion that day, and a lesser amount the next day, to try to shore up the ruble. With few other options available to it, the bank then said it would resume buying gold domestically. The Bank of Russia spent six years after the Crimea seizure rapidly accumulating gold, doubling its holdings and becoming the largest sovereign buyer.

7. What about monetary policy and regulation?

The Bank of Russia more than doubled the benchmark interest rate to 20%, a 19-year high, on Feb. 28 and also imposed capital controls, including a ban on selling securities to foreigners. Nabiullina said the decisions to suspend certain regulatory requirements amounted to a capital increase for banks worth 900 billion rubles ($8.7 billion). Putin has banned all Russian residents from transferring foreign currency abroad, tightening capital controls. On April 8, the central bank cut the rate to 17% and said further cuts could be made at future meetings if conditions allow. The move brought relief to the economy in recession and was a sign of confidence that the bank could begin to reverse some of the monetary tightening pronounced after the invasion of Ukraine.

8. Are there precedents for this turmoil?

Putin came to power shortly after the Russian government defaulted in 1998 on $40 billion in domestic debt, most of which was held by foreign investors. This led to a collapse of the ruble and its replacement with a new currency. There was another collapse of the ruble in December 2014, when falling oil prices combined with Western sanctions triggered a flight of Russian assets.

9. Is there a black market for the rouble?

Yes, some currency trading has gone underground. It is quite difficult to obtain details given the informal nature of these transactions. Traders also say locals and foreigners are buying and selling stocks over the phone, hoping to eventually settle trades. This creates an additional need for foreign currency.

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