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Aug 19, 2022
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What currency should we be friends with?

Washington, London, Brussels are closely following the currency movements of the Russian monetary authorities and are preparing “answers”

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On February 24, a special military operation began in Ukraine, and new words appeared among bankers and financiers that characterize foreign currency: “toxic”, “unfriendly”, “friendly”, “alternative”. Normatively, these terms have not yet been fixed, but officials and press services of various departments are already using words without hesitation, which a few months ago seemed to be journalistic slang.

For example, on August 8, Presidential Decree No. 529 “On the temporary procedure for fulfilling obligations under bank account (deposit) agreements denominated in foreign currency and obligations under bonds issued by foreign organizations” was signed. And already on August 9, the press service of the Central Bank of Russia officially commented on the adoption of the said document: “The introduction of such measures is aimed at encouraging businesses not to keep money in banks in the so-called toxic currencies, not to accumulate foreign currency balances on accounts. Banks, due to the fact that their correspondent accounts are blocked due to sanctions and the balances of funds on them are frozen, cannot fulfill their obligations to customers in the currency that is frozen. Banks are already making efforts to ensure that legal entities and individual entrepreneurs transfer funds in the currencies of unfriendly countries into rubles or into friendly currencies, and the decree creates additional incentives for this. If a company or individual entrepreneur decides to keep money in toxic currencies, then such clients will share with the bank the risk of freezing funds.“.

In the above fragment, the following terms are used: “currencies of unfriendly countries”, “friendly currencies”, “toxic currencies”. I repeat once again: neither the Central Bank, nor the Ministry of Finance, nor the Government has any list of these types of currencies. They don’t even have definitions.

I had to think. Here’s what I came up with.

Toxic Currencies”- those foreign currencies that were part of the currency assets of the Bank of Russia and which were subjected to a “freeze” in late February and early March. According to the Bank of Russia, this US Dollar, Euro, British Pound Sterling, Japanese Yen, Canadian Dollar, Australian Dollar, Singapore Dollar. Total 7 currencies. The only currency that was part of the assets of the Bank of Russia, which was not “frozen”, was the Chinese yuan.

Currencies of unfriendly countries” – the currencies of those countries that are included in the list of “unfriendly states” compiled by the government of the Russian Federation. This group includes all of the aforementioned “toxic currencies”. Plus, Swiss currencies (Swiss frank), South Korea (South Korean won), New Zealand (new zealand dollar), Norway (Norwegian krone), Iceland (Icelandic krone). Total 12 currencies.

Friendly currencies” – currencies of all countries not included in the list of “unfriendly states”. There are about 200 states in the world today. And the number of currencies is 159. Excluding the twelve “unfriendly currencies”, there are still 147 currencies. The richest choice! However, from almost the entire sea of ​​currencies, no more than a dozen can be of little interest.

And the monetary authorities (the Bank of Russia and the Ministry of Finance) are hinting to us which currencies should be “friends” in the new difficult conditions. These recommendations are voiced by the Moscow Exchange (where, by the way, the Central Bank is the main shareholder). it Chinese yuan, Hong Kong dollar, South African rand, Turkish lira, Kazakh tenge, Armenian dram, Belarusian ruble. Some of them have been trading for a long time (such as the Chinese yuan or the Kazakh tenge), while others (such as the Armenian dram and the South African rand) only started trading on the Moscow Exchange this summer. Two more currencies are on the way – United Arab Emirates dirham as well as Uzbek sum.

Most “friendly currencies” have disadvantages such as limited convertibility and liquidity. They also have high volatility (exposure to strong price fluctuations). Exchange rate regime – “free floating“. True, the Chinese yuan has a “managed exchange rate“. But this is also not very happy. From time to time, on command from above, the Chinese Central Bank changes the exchange rate of the yuan, and usually in the direction of weakening (in order to stimulate exports from the country). Holders of the Chinese currency may face immediate significant losses.

The most volatile currency from the range of the Moscow Exchange today is the Turkish lira. It has been slowly devaluing since 2017, and last year it depreciated sharply by half, to 15.7 liras per US dollar. Now its rate has approached 18 lira per dollar.

The Central Bank is trying to get Russian businesses and banks to voluntarily-compulsorily refuse “toxic” currencies, converting them into “friendly ones”. Above, I mentioned Presidential Decree No. 529, which was prepared on the proposal of the Central Bank. It gives the right to sanctioned Russian banks to suspend operations in “toxic currencies” on the accounts of individual entrepreneurs and legal entities. True, we are talking only about those banks that may be under sanctions after August 8 and about those foreign exchange funds that will go to accounts after August 8. However, who can guarantee that tomorrow or the day after tomorrow this or that bank will not be subject to sanctions? Therefore, bank customers should take care of the timely conversion of “toxic currencies” into “friendly currencies”.

In order to somehow expand the poor choice of “friendly currencies”, two currencies were admitted to the Moscow Exchange, which are quite different from the usual “friendly” ones.

it South African rand as well as hong kong dollar. They belong to the group of freely convertible currencies. “Freely convertible currency” (in a narrow definition, i.e. only for current settlements, but not for capital transactions) is the settlement currency in the international payment system CLS (Continuous Linked Settlement). The inclusion of a currency in this system allows you to make international payments, bypassing the conversion to other currencies. At first (in 2002) there were seven such currencies, since November 2015 there have been 18 of them. Among them are the two above-mentioned currencies.

However, if the South African rand is a volatile currency (free float mode), then the Hong Kong dollar is characterized by a strict exchange rate control regime. The latter can be called quasi US dollar. The fact is that its rate has been pegged to the American currency for about 40 years. Hong Kong Monetary Authority (Hong Kong Monetary Authority, HKMA) allows it to fluctuate only within the established corridor – from 7.75 to 7.85 Hong Kong dollars per US dollar. The interest of Russians and businesses in the Hong Kong dollar in 2022 increased markedly, and on March 18, the trading volume broke a historical record, exceeding 537 million rubles. Now the daily volume of transactions in the Hong Kong dollar-ruble pair with settlements for tomorrow varies, exceeding 300 million rubles on some dates. Additional demand for the Hong Kong dollar arose due to the fact that shares of Hong Kong companies with settlements in Hong Kong dollars began to be traded on the St. Petersburg Stock Exchange.

The Moscow Exchange promises that in the near future the Russians may have a second quasi-dollar – the UAE dirham. This monetary unit is considered one of the most stable currencies in the world, because. since the beginning of the 1980s, the dirham has been rigidly pegged to the US dollar (3.6725 dirhams per dollar). To maintain it, the Emirates, which are among the top ten countries with the largest oil reserves, have a stable dollar flow from oil and gas exports and a significant amount of accumulated foreign exchange reserves (more than $120 billion). Unlike the ruble, whose exchange rate is highly dependent on oil prices, fluctuations in the hydrocarbon market have almost no effect on the dirham exchange rate.

One can talk for a long time about the pros and cons of alternative currencies that the monetary authorities offer to Russian legal entities and individuals, but all of them have a major drawback – today they are “friendly”, and tomorrow they may cease to be so. The fact is that Washington and its closest allies (London and Brussels) are closely following the currency movements of the Russian monetary authorities and are preparing “answers”. They may consist in putting pressure on those “friendly” countries whose currencies are offered by the Russian monetary authorities as an alternative to the US dollar, euro and other “toxic currencies”. Pressure can be expressed in the threat of imposing secondary sanctions. It is no secret that many “friendly” countries today, without advertising, today evade trade operations that threaten with secondary sanctions. Even such an ally of Russia as China, after February 24, greatly reduced its export supplies to our country.

Are monetary authorities capable of distinguishing between truly “friendly” countries and countries that are “friendly” today and tomorrow may be on the list of “unfriendly states”? I have strong doubts about this. As an example, I will cite the situation that developed after the introduction of anti-Russian sanctions by Washington in 2014. Then at Neglinka (the address of the Central Bank) it was decided to change the currency structure of international reserves. A course was taken to replace US dollars (this currency dominated the reserves) with the euro. For some reason, the Neglinka decided that the European currency is “friendly” and carries no political risks. By the middle of last year, the share of the euro in Russia’s gold and foreign exchange reserves had already reached 32.3% against the share of the US dollar at 16.4%. And how did it all end? Brussels froze the euro as part of Russia’s international reserves a day after Washington froze the dollar part. Here is a “friendly” currency for you!

I have already written about the risks and problems that arise from the accumulation of foreign currency (even the most “friendly”) in the reserves of the Russian Federation, including the National Welfare Fund. Sober-minded domestic economists and politicians call for the “devaluation” announced by the monetary authorities to be consistently brought to an end, and not turn into the conversion of toxic currencies into so-called friendly ones. I repeat once again: Russia can only have two “friendly currencies”: the Russian ruble and gold. For internal use, the usual ruble, for external use – gold and foreign currency ruble

Head of the State Duma Committee on Industry and Trade Vladimir Gutenev (United Russia) at a plenary meeting of the business program of the International Military-Technical Forum “Army-2022” on August 17, said that the excess of free funds collected under the budget rule should not be converted into foreign currencies and sent to the National Welfare Fund, but invest in the salaries of Russian workers to increase consumer demand and stimulate the development of the country’s economy. The deputy severely criticized the proposal of the Ministry of Finance to return the budget rule and restore the currency NWF with the help of the so-called “friendly currencies”: “I don’t know friendly currencies. I do not consider yuan, rupee, or Turkish lira friendly. We see how our partners and their banks are afraid of secondary sanctions and act very carefully. But maybe we should revise the range and volume of state reserves? We need to invest in the salaries of our workers, because what our riveters, locksmiths, and turners receive will not go into yachts and apartments abroad. This will return with increased consumer demand for a domestic product and will stimulate the development of our economy.“.

Photo: REUTERS/Florence Lo

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