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U.S. Sanctions Against Russia

New US sanctions against Russia have led to an immediate halt in trading of dollars and euros on the Moscow Exchange, the country’s main financial marketplace. The sanctions are part of ongoing efforts to curtail Russia's ability to finance its military operations in Ukraine, targeting various aspects of the Russian economy.

MOEX, the Moscow Exchange, and the Russian central bank swiftly issued statements on Wednesday, a public holiday in Russia, just an hour after Washington announced new sanctions designed to cut off financial and material support for Moscow’s war in Ukraine. The sanctions also aim to isolate Russia from the global financial system and reduce its economic resilience.

"Due to the introduction of restrictive measures by the United States against the Moscow Exchange Group, exchange trading and settlements of deliverable instruments in US dollars and euros are suspended," the central bank announced.

This suspension means that banks, companies, and investors can no longer trade these currencies via a centralized exchange, which typically provides benefits such as greater liquidity, transparency, and regulatory oversight. The sanctions specifically target the Moscow Exchange Group and the National Clearing Centre, critical components of Russia's financial infrastructure.

Now, trades must be conducted over the counter, directly between two parties, which could lead to higher transaction costs and less efficient pricing. The central bank stated it would use data from these trades to set official exchange rates, although this could result in less reliable benchmarks for the market.

Many Russians keep savings in dollars or euros, aware of past crises where the ruble's value plummeted. The central bank assured the public that these deposits remain secure, aiming to prevent a potential panic that could lead to a run on banks."

Companies and individuals can continue to buy and sell US dollars and euros through Russian banks. All funds in US dollars and euros in the accounts and deposits of citizens and companies remain safe," it reassured.

A representative from a large, non-sanctioned Russian commodities exporter told Reuters: "We don’t care, we have yuan. Getting dollars and euros in Russia is practically impossible." This sentiment reflects the growing use of alternative currencies, particularly the Chinese yuan, as Russia seeks to diversify its financial system away from Western currencies.

As Moscow seeks closer trade and political ties with Beijing, China's yuan has become the most traded currency on MOEX, making up 53.6% of all foreign currency trades in May. This shift highlights Russia's strategic pivot towards Asia in response to Western sanctions.

On MOEX, dollar-ruble trading typically amounts to about 1 billion rubles ($11 million) per day, and euro-ruble trading around 300 million rubles ($3 million) daily. Yuan-ruble trading now frequently surpasses 8 billion rubles ($90 million) daily, indicating the increasing reliance on the Chinese currency.

Dollar Rates Rapidly Rising

On the eve of the national holiday, the ruble closed at 89.10 to the dollar and 95.62 against the euro. Following the sanctions announcement, some banks immediately raised their dollar rates, reflecting increased uncertainty and volatility in the currency market.

Norvik Bank initially offered to buy dollars for just 50 rubles and sell for 200 rubles, later adjusting to 88.20/97.80. Tsifra Bank was buying dollars at 89 rubles and selling at 120. These wide spreads indicate significant disruptions in the foreign exchange market and potential difficulties for businesses and individuals needing to transact in dollars.

The US Treasury stated it was "targeting the architecture of Russia’s financial system, which has been reoriented to facilitate investment into its defense industry and acquisition of goods needed to further its aggression against Ukraine." This includes measures to cut off access to technologies and financial resources critical to sustaining military operations.

Russia’s central bank has been preparing for such sanctions for about two years. In July 2022, the bank indicated it was modeling various sanctions scenarios with foreign exchange market participants and infrastructure organizations. These preparations aimed to mitigate the impact of Western economic measures and maintain financial stability."

This is bad but expected news," Russian broker T-Investments commented on Telegram, reflecting a sense of resignation among financial professionals in Russia.

Forbes Russia reported in 2022 that the central bank was discussing mechanisms for managing the ruble-dollar exchange rate if exchange trading were halted due to sanctions against MOEX and its National Clearing Centre, which was also targeted by the new sanctions. These mechanisms include using alternative financial instruments and currency pairs to maintain market functioning.

MOEX announced that share trading and money market trades settled in dollars and euros would also be suspended. The money market involves low-risk, short-term debt instruments like government bonds and commercial debt, which are crucial for liquidity management in the financial system. This suspension could lead to tighter liquidity conditions and increased borrowing costs for Russian entities.