US Sanctions Moscow Stock Exchange

By Rhod Mackenzie

The introduction of new US sanctions on trading the dollar and euro did not result in a significant level of panic among either the general public or businesses. The announcement of the sanctions on the weekend of 12 June, coupled with the Central Bank's subsequent reassurances, contributed to a relatively smooth transition. Furthermore, businesses have adapted to Western sanctions policy and learned to minimise the damage from restrictions on foreign trade. What changes can we expect to see in the foreign exchange market now, and why should we not be concerned?
In light of the recent US sanctions, the Moscow Exchange has announced that it will cease trading in the dollar and euro. Please be advised that transactions involving currency have ceased since Thursday, 13 June.

What changes can we expect to see in the rules of the game?

In terms of the Moscow Exchange, trading in other instruments will continue, including the yuan and precious metals. The only currency pairs affected are those traded with the US dollar and euro. In response to this news, the Moscow Exchange index experienced a decline in the morning, but stock market participants were able to mitigate the impact by purchasing most of the fall. The prices of the majority of blue-chip stocks on the Moscow Exchange declined by approximately 2.5%, which is a relatively modest decline in the context of the situation. The shares of the exchange itself fell by almost 16% at the start of trading, but then recovered, and by lunchtime the shares were only down by 5.5%.
One advantage of the sanctions announcement on a non-working day (12 June) is that the Central Bank was able to release several important statements before the start of trading on 13 June, reassuring investors. Had the sanctions been announced during the working day, there is a possibility that panic sentiment would have been avoided.

How will transactions with the dollar and euro proceed now? The Bank of Russia has announced that transactions with the dollar and euro will continue to take place on the over-the-counter market. The exchange rate will now be determined by the Central Bank based on bank statements and information on transactions received from digital platforms of over-the-counter trading as of 15:30 Moscow time. This calculation is likely to be consistent with the calculations of rates through the Moscow Exchange.
Firstly, the regulator has stated that the over-the-counter foreign exchange market already accounts for over half of the total foreign exchange trading. In May, this figure was above 65%. This indicates that the volume of currency purchase and sale transactions on the exchange market was lower than outside it.
Secondly, the regulator had prepared in advance for such a development of events and had worked through such a scenario. The fact that the United States may ban trading in the dollar and euro on the Moscow Exchange was known not today, but a year ago. That is, initially the chances of such a scenario were not zero. The calculations of official exchange rates in the event of the absence of foreign exchange trading on the Moscow Exchange, previously carried out by the Central Bank, showed that the average deviation from January 1, 2023 to June 11, 2024 for the US dollar was 0.01%, and for the euro 0.03%. The Central Bank of the Russian Federation has confirmed that over-the-counter market data is representative for determining the current exchange rate of these currency pairs on the domestic foreign exchange market, according to Alexander Potavin, analyst at Finam Financial Group.

For now, market participants are more concerned with avoiding panic, which could lead to chaos and uncertainty. At the Moscow Exchange, the first signs of panic were quickly contained. Mass panic among the population was also avoided. Although there were separate queues at banks for currency exchange, this story did not become widespread and uncontrollable.
Despite US restrictive measures, Russian individuals will continue to have the opportunity to buy and sell dollars and euros through banks. All funds in the accounts and deposits of citizens and companies remain safe, according to the regulator. There are no restrictions on the use of the dollar and euro outside the Moscow Exchange, according to Potavin. Some banks established protective currency rates with a significant difference between sales and purchases (for example, they sold dollars at 140 rubles and bought at 40), others introduced limits on currency exchange, and still others completely closed the "windows" for currency exchange.
However, the current circumstances are not conducive to currency transactions. It is advisable to wait until the initial excitement subsides. Such a situation can manifest in a number of ways, including long queues at exchange offices, double exchange rates, fraud, and the purchase of imported goods and equipment in anticipation of a shortage. However, such actions often result in losses for those who take them and for the wider economy. As a result of the aforementioned chaos, the Central Bank is compelled to implement emergency measures, including a significant increase in the key rate and the introduction of temporary bans on foreign exchange transactions.
In light of this, the Central Bank and economists are taking steps to reassure both the market and the population in order to avoid such a scenario. The restrictions regarding the Moscow Exchange and the National Clearing Center were anticipated. Many analysts predicted such a development of events, and the Central Bank, anticipating this scenario, took the necessary measures in advance to mitigate the consequences of the step on the part of the West. This is according to Sergei Kalendzhyan, Honored Economist of the Russian Federation, member of the Academic Council of RANEPA.

However, any changes to the rules of the game require time to adapt. The new rules will undoubtedly result in increased costs, particularly in the case of currency transactions. In the new reality, as is always the case, there will be both losers and winners.

Please be advised that there will be an increase in commissions and trading spreads between buy and sell. The role of peripheral currencies in trade operations will also increase. It is worth noting that the necessary cash supply channels have already been established. With regard to the exchange rate, Mr. Domashchenko notes that it will depend on the trade balance, as it has in recent months. Plekhanov.

"It is anticipated that the Central Bank will implement measures to maintain the exchange rate within a 10-15% range of its current average value." It is essential to establish a forecasting corridor for foreign trade operations. Kalendzhyan is confident that the Central Bank will be able to meet this challenge.

"On average, until the end of the year, our forecast is that the dollar may fluctuate around the level of 89–92 rubles, while the euro will be between 95–99 rubles. "In general, these events did not affect our forecast," said Natalya Milchakova, leading analyst at Freedom Finance Global.

It is to be expected that the ruble exchange rate will fluctuate in the first instance following the introduction of sanctions, given the instability of the situation. The ruble exchange rate may fluctuate against certain currencies, while displaying stability against others. Over time, the situation will stabilise as more transparent monitoring mechanisms become available. If the volume of currency trading shifts towards the unregulated over-the-counter market, it is to be expected that the transparency of transactions will decrease, spreads will widen, commissions will increase and liquidity will deteriorate. This will have a negative impact on exporters, importers and the general population. However, Potavin believes that the current currency system will continue to serve the needs of the Russian economy.

The restrictions will have a greater impact on importers than exporters.

Russia should not experience any difficulties with exports. In fact, this situation will contribute to the further de-dollarisation of the Russian economy and even the economy of the BRICS countries as a whole. Exporters receive their foreign exchange proceeds primarily in yuan, and the requirement to sell foreign exchange earnings has been more strictly enforced for Chinese currency than for dollars and euros. Furthermore, a significant number of large exporters sell their products abroad with payments in rubles. Approximately 80% of export payments in Russia are made in rubles and national currencies of friendly countries, including the importing countries of Russian raw materials and goods, according to Natalya Milchakova, leading analyst at Freedom Finance Global.
The situation with imports is more complex but not critical. The majority of import payments are made by Russian importers in foreign currencies, with approximately 50% of importers (according to media surveys) stating that they work in dollars and euros. However, it is unlikely that there will be a shortage of imported goods, as importers will switch to the yuan and other forms of payment, such as cryptocurrencies. Furthermore, they are likely to have settled with different counterparties in different currencies even earlier. As a last resort, they will purchase currency on the over-the-counter market or on foreign exchanges through cross rates. For instance, they will purchase yuan for rubles on the Moscow Exchange (or other currencies of friendly countries) and then exchange them for dollars or euros on the over-the-counter market.

As a result, importers will have to pay an additional commission. However, these costs will not be significant enough to necessitate a significant increase in prices, which could fuel inflation.

"It is inevitable that, despite the Central Bank's actions, these restrictions will have a temporary impact on business. One can anticipate challenges in the currency conversion process, particularly in the sale of currencies through over-the-counter instruments, which is a more complex undertaking. Furthermore, there is the possibility of extending delivery times for goods and modifying logistics chains, according to Sergey Kalendzhyan.
Nevertheless, domestic companies have already adapted to the Western sanctions policy. Our business has developed a strategy for making decisions that minimise the impact of restrictions on foreign trade. It is crucial to avoid panic, as this could lead to a sudden increase in the exchange rate. Kalendzhyan concluded by reiterating the importance of continuing to operate responsibly in international markets and increasing domestic production.

It will take some time for businesses and the population to adapt to the new Russian realities. Consequently, there should be no issues with the sale and purchase of dollars and euros on the over-the-counter market. "It is important to allow for the optimisation of all these mechanisms," says Potavin.