Aug 9, 2022
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Moscow Exchange: the yuan has entered into a fierce competition with the US dollar and the euro

However, over-reliance on the yuan also comes with risks

The Moscow Exchange performs in Russia the functions of an exchange platform for trading currencies. Before the start of the sanctions war, ten currencies were traded on our currency 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), Kazakh tenge (KZT).

The sanctions war is making changes to currency trading. At the beginning of the summer, the Moscow Exchange announced that it was suspending 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, was caused by “difficulties in making settlements in Swiss francs”, which is associated with the sanctions imposed by Switzerland on June 10. Switzerland has joined the sixth package of anti-Russian sanctions of the European Union. It includes sanctions against the operations and funds of the National Settlement Depository (NSD), which is the central depository in Russia and is almost wholly owned by the Moscow Exchange. NSD keeps records of ownership of securities, as well as settlements on transactions with securities and currency. According to Frank Media’s estimates, EUR 4.5-7 billion were frozen on NSD’s accounts in foreign depositories after the EU blocking on June 3.

And here is another piece of news from the Moscow Exchange. Since August 8, she has suspended trading in the Japanese yen. The restrictions will affect the Japanese yen-Russian ruble and US dollar-Japanese yen currency pairs, the exchange said. According to analysts, investments in this currency have become too risky in the face of anti-Russian sanctions policy, which was supported by Japan. “The suspension of operations is due to potential risks and difficulties in making settlements in the Japanese yen,” the press service of the exchange explained. The day before, Japan introduced a number of restrictions against Russia: a ban on gold imports, 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 signs 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 arise in connection with the use of the Swiss franc and the Japanese yen. Why does Moscow not stop trading in American and European currencies? It’s very simple: Russia cannot abandon the US dollar and the euro for the reason that in these two currencies the majority of all Russian export and import transactions are carried out. At the end of 2021, the US dollar and the euro accounted for 54.5 and 29.7 percent of export earnings, respectively. In payments on imports, the shares of these currencies were 35.8 and 30.4 percent, respectively. The Central Bank stopped publishing quarterly statistics on the currency structure of payments for Russia’s exports and imports. Yes, it can be assumed that since the beginning of the sanctions war of the collective West against Russia, the share of the two main “toxic” currencies in payment transactions for exports and imports has decreased due to the wider use of the Russian ruble and the currencies of “friendly” states. But we will probably not be much mistaken if we say that even today at least half of all settlements in Russia’s foreign trade are still carried out with the help of the US dollar and the euro.

And the Russian authorities would like to ban these “toxic” currencies on the Moscow Exchange, but then we will lose at least half of our entire foreign trade. With the Swiss franc and the Japanese yen, everything is easier – Russia’s Russian trade with Switzerland and Japan today accounts for 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 more and more signs that the collective West will finally block the work of the NSD, freezing the funds that the Russian depository placed in dollars and euros in foreign depositories. Yes, this can become the most powerful sanction against Russia of the collective West – to stop half of Russia’s foreign trade in one fell swoop! However, there are two “buts” here.

Firstlythe collective West will not even shoot itself in the foot, but in the head with such a sanction. The supply of natural gas for the euro to Europe will immediately stop. There is no need to explain the consequences of stopping gas supplies to Europe. Oil deliveries for dollars, which are still going to “unfriendly countries”, will also stop.

Secondlypartially blocking dollar and euro trading on the Moscow Exchange can be offset by increased operations on the OTC market (currency trading conducted by Russian banks). It is more difficult for the collective West to strike at the over-the-counter market than at 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” rates, but more “tough”. In some ways, the mechanism for determining the rate will resemble the one that is used in China today (“controlled rate”). Some experts believe that such a “non-market” way of determining the rate will inevitably provoke banks to manipulation and even cartel collusion between “trusted” banks.

There are skeptics among experts 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 exchange traders reduce their positions in dollars and euros. These two “toxic” currencies are proposed to be converted as much as possible into the Chinese yuan and other “friendly” currencies. Of course, among the “friendly” currencies, the yuan is out of competition. Incidentally, the Moscow Exchange became the first organized market for the yuan outside of China. The Chinese yuan/Russian ruble (CNY/RUB) currency pair with “today” delivery was first traded on the Moscow Exchange in December 2010. Trading in the CNY/RUB currency pair with tomorrow delivery became available on the exchange in 2013.

Currency trading on the Moscow Exchange has dipped significantly since the start of the sanctions war. The volume of trading 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 Exchange, the yuan has entered into a sharp competition with the US dollar and the euro. Trading in the US dollar in July amounted to more than half – 2.4 trillion rubles. In second place was the euro – 1.1 trillion rubles. (25% of all turnovers on the exchange). The third place was taken by the Chinese yuan – 890 billion rubles. (twenty%). Other “friendly” currencies do not come close to the yuan (turnovers last month, billion rubles): Hong Kong dollar – 4.8; Kazakh tenge – 4.0; Turkish lira – 2.6; Belarusian ruble – 1.0.

Third place for the yuan – according to the results of the entire last month. However, in the third ten days of July, the yuan on some days began to outperform the euro, and once outperformed even the US dollar. It is possible that by the end of August, the yuan will become the second currency in terms of turnover, surpassing the euro. And by the end of autumn or the year, the US dollar will also bypass.

In general, under any scenario, it turns out that the Moscow Exchange may eventually turn into a platform where the Chinese yuan will be traded mainly. Some believe that the Chinese currency is a lifesaver for Russia in the context of the sanctions war. However, over-reliance on the yuan also comes with risks. First, as I have already noted, China’s monetary authorities do not use a “floating” but a “managed” yuan exchange rate. 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. Secondly, the current aggravation of the situation around Taiwan may lead to US sanctions against China. Up to the freezing of China’s gigantic foreign exchange reserves (over $3.2 trillion). And this could undermine the position of the yuan as a reserve currency.

Of course, the conversion of the current “toxic” currencies (US dollar and euro) into the Chinese yuan and other “friendly” currencies on the Moscow Exchange should be considered as an intermediate goal. The ultimate goal of these operations should be the purchase of machinery and equipment for the industrialization of Russia. Yuan is very 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 beginning of the sanctions war of the collective West against Russia, our imports of machinery and equipment from China have declined markedly because Chinese suppliers feared secondary sanctions. However, recent events around Taiwan give hope that China will cooperate more actively with Russia. Including increase the supply of machinery and equipment we need.


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