/View.info/ Excessive reliance on the yuan, however, also carries risks
The Moscow Stock Exchange performs the functions of an exchange platform for currency trading in Russia. Before the start of the sanctions war, ten currencies were traded on our exchange: US Dollar ($), Euro (EUR), British Pound Sterling (GPB), Japanese Yen (JPY), Hong Kong Dollar (HKD), Turkish Lira (TRY), Swiss Franc (CHF), Chinese Yuan (CNY), Belarusian Ruble (BYR), Kazakhstani Tenge (KZT).
The war with sanctions has made changes in currency trading. At the beginning of the summer, the Moscow Stock Exchange announced that it would stop trading in the Swiss franc from June 14. The restrictions affected both the Swiss franc-Russian ruble currency pair and the US dollar-Swiss franc pair.
The suspension of operations, as reported on the exchange’s website, is due to the “difficulties making settlements in Swiss francs”, which is related to the sanctions imposed by Switzerland on June 10. Switzerland has joined the European Union’s sixth package of anti-Russian sanctions.
It includes sanctions against the operations and funds of the National Settlement Depository (NSD), which is the central depository in Russia and is almost entirely owned by the Moscow Stock Exchange. NRD maintains documentation of ownership of securities, as well as settlements of securities and currency transactions. According to estimates by Frank Media, EUR 4.5-7 billion have been frozen in NRD accounts in foreign depositories since the EU blockade on 3 June.
And here is another news from the Moscow Stock Exchange. As of August 8, it has suspended trading with the Japanese yen. The restrictions will affect the currency pairs “Japanese yen – Russian ruble” and “US dollar – Japanese yen”, the exchange announced. According to analysts, investments in this currency have become too risky against the background of the policy of anti-Russian sanctions, which was supported by Japan.
„The suspension of operations is due to potential risks and difficulties in making settlements in Japanese yen,” explained the press service of the stock exchange. A day ago, Japan introduced a number of restrictions against Russia: a ban on the import of gold, on the provision of trust, accounting, auditing and consulting services. In addition, the assets of a number of Russian individuals and legal entities were frozen. That’s right: the Japanese yen has all the hallmarks of a “toxic” currency.
However, the signs of such a “toxic” currency are even more pronounced in the US dollar and the euro. And the amount of potential losses associated with their use is higher than those that could occur in connection with the use of the Swiss franc and the Japanese yen. Why does Moscow not stop trading with American and European currencies?
Everything is very simple: Russia cannot give up the US dollar and the euro for the reason that the majority of all Russian exports and imports are made in these two currencies. At the end of 2021, the US dollar and the euro accounted for 54.5 and 29.7 percent of export earnings, respectively. In import payments, the shares of these currencies are respectively 35.8 and 30.4 percent.
The central bank has stopped publishing quarterly statistics on the currency structure of payments for Russia’s exports and imports. Yes, you can guess that since the beginning of the collective West’s sanctions war against Russia, the share of the two main “toxic” currencies in export and import payment transactions has decreased due to the wider use of the Russian ruble and the currencies of “friendly” countries. But we probably won’t be far wrong if we say that even today at least half of all payments in Russia’s foreign trade are still made with the help of the US dollar and the euro.
And the Russian authorities would like to ban these “toxic” currencies from the Moscow Exchange, but then we would lose at least half of all our foreign trade. With the Swiss franc and the Japanese yen, everything is easier – Russia’s trade with Switzerland and Japan today is a mere trifle.
But if the Russian authorities refrain from banning the US dollar and the euro, then Washington and Brussels are seriously thinking about it. There are increasing signs that the collective West will finally block the work of the NRD, freezing the funds that the Russian depository has deposited in dollars and euros in foreign depositories. Yes, this could become the most powerful sanction against Russia in the collective West – in one fell swoop, stop half of Russia’s foreign trade! However, there are two “buts” here.
First, the collective West will not even shoot itself in the foot, but in the head with such a sanction. Deliveries of natural gas against euros to Europe will immediately stop. There is no need to explain the consequences of stopping gas supplies to Europe. They will also stop the supply of oil for dollars, which is still going to “enemy countries”.
Secondly, a partial blocking of trading in dollars and euros on the Moscow Exchange can be compensated by an increase in operations on the over-the-counter market (currency trading carried out by Russian banks). It is more difficult for the collective West to hit the OTC market than the foreign exchange market of the Moscow Exchange. By the way, in this case it will be necessary to develop a special method for determining the exchange rate of the US dollar and the euro.
The Bank of Russia will collect quotes for the sale and purchase of foreign currency from “trusted” commercial banks. Most likely, these will no longer be the current “floating” interest rates, but more “firm”. In some respects, the mechanism for setting interest rates will resemble that used in China today (“controlled exchange rate”). Some experts believe that such a “non-market” way of determining the exchange rate will inevitably provoke the banks to manipulations and even cartel collusion between the “trusted” banks.
Among the experts, there are skeptics who believe that the probability of blocking transactions with US dollars and euros on the Moscow Exchange is not high. But the Bank of Russia strongly recommends that stock traders reduce their positions in dollars and euros. It is suggested that these two “toxic” currencies should be converted as much as possible into Chinese yuan and other “friendly” currencies.
Of course, among the “friendly” currencies, the yuan is beyond all competition. By the way, the Moscow Exchange became the first organized market for the yuan outside of China. On the Moscow Stock Exchange in December 2010, the first trading session of the Chinese yuan/Russian ruble (CNY/RUB) currency pair with delivery “today” was held. Trading the CNY/RUB currency pair with delivery tomorrow became available on the exchange in 2013.
Currency trading on the Moscow Stock Exchange has fallen significantly since the start of the sanctions war. The volume of trade in all currencies in February amounted to a very high figure – about 10.2 trillion rubles. But in June – only 3.8 trillion rubles. Last month – already 4.5 trillion rubles, or 18% more.
And now, on the Moscow Stock Exchange, the yuan entered fierce competition with the US dollar and the euro. Trade in US dollars in July amounted to more than half – 2.4 trillion rubles. In second place is the euro – 1.1 trillion rubles. (25% of all exchange turnover). Third place is occupied by the Chinese yuan – 890 billion rubles. (twenty %). Other “friendly” currencies do not even come close to the yuan (turnover from last month, billions of rubles): Hong Kong dollar – 4.8; Kazakh tenge – 4.0; Turkish lira – 2.6; Belarusian ruble – 1.0.
Third place for the yuan based on the whole of last month. During the third ten days of July, however, the yuan began to outperform the euro on some days, and once even outperformed the US dollar. It is possible that by the end of August, the yuan will become the second most traded currency, overtaking the euro. And by the end of the fall or the end of the year, the US dollar may also be overtaken.
All in all, in any scenario, it appears that the Moscow Exchange may eventually become a platform where the Chinese yuan will be primarily traded. Some see the Chinese currency as a savior for Russia in the context of the sanctions war. Overreliance on the yuan, however, also carries risks.
First, as I have already noted, the Chinese monetary authorities do not use a “floating” but a “regulated” exchange rate for the yuan. From time to time, they may deliberately lower the exchange rate of their national currency in order to increase the competitiveness of their goods in the world market.
Second, the current escalation of the situation around Taiwan could lead to US sanctions against China. Until the freezing of China’s gigantic foreign exchange reserves (over 3.2 trillion dollars). And that could undermine the yuan’s position as a reserve currency.
Of course, the conversion of the current “toxic” currencies (the US dollar and the euro) into the Chinese yuan and other “friendly” currencies of the Moscow Exchange should be seen as an intermediate goal. The ultimate goal of these operations should be the purchase of machinery and equipment for the industrialization of Russia.
Yuan will be needed here. After all, according to the results of 2021, 40 percent of all Russian imports of machinery and equipment came from purchases in China. Since the start of the collective West’s sanctions war against Russia, our imports of machinery and equipment from China have declined significantly because Chinese suppliers feared secondary sanctions.
However, recent events surrounding Taiwan give hope that China will cooperate more actively with Russia. Including increasing the supply of the machines and equipment we need.
Translation: ES
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