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How War and Sanctions Make the Ruble Harder to Trade

A sign displays foreign currency exchange rates to the Russian ruble at an exchange bureau in Moscow, Russia, on Monday, Feb. 28, 2022. The Bank of Russia acted quickly to shield the nation’s $1.5 trillion economy from sweeping sanctions that hit key banks, pushed the ruble to a record low and left President Vladimir Putin unable to access much of his war chest of more than $640 billion.
A sign displays foreign currency exchange rates to the Russian ruble at an exchange bureau in Moscow, Russia, on Monday, Feb. 28, 2022. The Bank of Russia acted quickly to shield the nation’s $1.5 trillion economy from sweeping sanctions that hit key banks, pushed the ruble to a record low and left President Vladimir Putin unable to access much of his war chest of more than $640 billion. (Bloomberg)
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The blast of sanctions against Russia following its invasion of Ukraine sent its currency plunging, splitting prices for rubles traded inside Russia from those quoted offshore by international banks. When trading in Moscow resumed, it was clear the currency had effectively devalued by 25% or more, its biggest drop since the Russian annexation of Crimea in 2014. That was followed by a blistering rally back 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 because of capital controls, forced dollar sales and ultra-thin volumes. 

1. Where and how does the ruble trade?

Before the war, the ruble was traded round-the-clock in the interbank market. It also changed hands on the Moscow 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 busiest phase of the foreign-exchange market, when London and New York are both open. Those hours were temporarily shortened to between 10 a.m. and 7 p.m. in early March. Trading volumes have shrunk to their weakest in a decade, based on the 20-day moving average. 

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

While foreign-exchange trading is mostly an over-the-counter operation globally, the ruble has been traded substantially on the Moscow Exchange, both in the spot and forward markets. There are historical reasons for this. When the Soviet Union collapsed, there was a need to establish a market rate for the ruble against the dollar and the Moscow Interbank Currency Exchange was formed for the purpose. In time, the exchange grew to offer trading in stocks and other securities, but remained a currency-trading hub. In 2011, it merged with the Russian Trading System to form the Moscow Exchange, which carried on the legacy. 

3. What happened to the onshore and offshore markets? 

When the war erupted, the offshore market reacted quickly to the prospect of Russia’s isolation from the global financial markets and traders sent the ruble tumbling. But at the Moscow Exchange, the reaction came more slowly, in multiple stages. The exchange eventually allowed the ruble to find its level in the onshore market too, but for a while, there was a gap of as much as 15% between the Moscow rate and the offshore rate. The difference has since narrowed. The ruble is not the only currency to have two rates. China’s yuan has an onshore and offshore rate, and a gap persists between the two owing to costs and the ease of transactions.

4. Is this the end of free trading of the ruble?

As things stand, traders no longer consider the ruble to be a free-trading currency. Capital controls imposed in the aftermath of Western sanctions mean the exchange rate is effectively a managed one. Russia has forced exporters to sell foreign exchange and is also demanding its natural gas be paid for in rubles. Many currency-trading shops have stopped dealing in the ruble on the grounds that its value seen on monitors is not the price it can be traded at in the real world. That brings the curtains down on its free float since 2014 unless Russia’s international isolation ends and the country allows purely market-based pricing once more. Russians initially lined up at cash machines around the country to withdraw foreign currency, but panic has subsided since the ruble stabilized. Strategists say the ruble’s rally isn’t credible, and that the currency would be trading at a very different level if artificial barriers were removed.

5. How has the ruble historically been propped up? 

Prior to 2014, the Bank of Russia defended the ruble using a trading corridor measured against a basket of dollars and euros. However, it made a commitment to move away from targeting exchange rates to targeting inflation instead, widening the band several times before abandoning it altogether. Since then, the central bank has only retained intervention as a means of propping up the currency in times of volatility, through currency sales and purchases.

6. Has the central bank stepped into the market this time?

Since the imposition of sanctions following the invasion, the central bank can’t intervene in the foreign-exchange market because a good portion of its reserves are blocked. On Feb. 24, the day the invasion started, the Bank of Russia did intervene for the first time in years as part of a suite of measures attempting to stabilize Russia’s financial system. Governor Elvira Nabiullina said it spent $1 billion that day, and a smaller amount the following day, in an attempt to shore up the ruble. With few other options at its disposal, the bank then said that it would resume buying gold on the domestic market. The Bank of Russia spent six years following the seizure of Crimea rapidly accumulating gold, doubling its holdings and becoming the biggest 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 foreigners’ selling of securities. Nabiullina said decisions to suspend some regulatory requirements amounted to a capital boost for banks equivalent to 900 billion rubles ($8.7 billion). Putin banned all Russian residents from transferring foreign currency abroad, hardening capital controls. On April 8, the central bank lowered the rate to 17% and said further cuts could be made at upcoming meetings if conditions permit. The move offered relief to the recession-bound economy and was a sign of confidence that the bank could start to reverse some of the steep monetary tightening delivered 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 of domestic debt, the bulk of which was held by foreign investors. That led to a slump in the ruble and effectively its replacement with a newly denominated currency. There was another ruble meltdown in December 2014, when plunging oil prices combined with western sanctions sparked a flight from Russian assets. 

9. Is there a black market for the ruble?

Yes, some of the currency trading has gone underground. It is quite difficult to get details given the informal nature of these deals. Traders also say both locals and foreigners are buying and selling stocks via phone calls, hoping eventually to settle the trades. This creates a further need for foreign exchange.

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