How the ruble exchange rate will be formed in the new reality

Since June 13, in RUSSIA, due to US blocking sanctions against the Moscow Exchange and its structures (the National Settlement Center and the National Clearing Center), exchange trading in the US dollar and euro, as well as the Hong Kong dollar, has been stopped. The official exchange rate, which was previously based on exchange trading, is now calculated by the Bank of Russia using a new methodology - based on data from bank transactions in currency and information from over-the-counter digital platforms. RBC was looking into how the new reality in the foreign exchange market will affect the exchange rate and transactions with foreign currency.

Until June 12, 2024 , it was possible to track the current dollar and euro exchange rates on the Moscow Exchange. Data was provided in real time on weekdays. Starting from June 13, the official dollar and euro exchange rates are available only on the Bank of Russia website. It is published once a day, as before. Until 15:30 Moscow time of the current day, the Central Bank collects data, and around 17:00 Moscow time publishes information on the official exchange rate of American and European currencies for the next day. That is, for example, on June 18, the regulator calculates and publishes the exchange rate that will be in effect on June 19, and so on. This course is used for official calculations, such as taxes, duties, COURT records, statistics, etc. Economic participants do not have the obligation to enter into transactions only at the official exchange rate.

There are three ways to roughly estimate the position of the ruble against foreign currencies before the Central Bank publishes data. Firstly, through the exchange rate of the yuan. It will set the trajectory for other currencies, the regulator noted earlier. Economists explained that, having the exchange rate of the yuan to the ruble, through cross rates it is possible to calculate the rate of the Russian currency to others, using data from the central banks that issue these currencies. That is, the stronger the ruble is against the yuan at auction, the stronger it will be against other currencies. But this does not mean that it will be possible to buy a dollar at this particular cross rate: the final cost of the transaction will depend on many factors, in particular on the seller and the platform where the payments will take place.

Secondly, settlement currency instruments on the Moscow Exchange can be a reference point. They show what market participants' expectations for the exchange rate are. Perpetual futures for the dollar and euro show how the market evaluates the rate at the moment, while quarterly futures for the American and European currencies show the market's expectations of the rate in the future.

Thirdly, indicative exchange rates are published by the Cbonds portal. They are calculated based on quotes from Russian banks for legal entities and non-cash conversion for individuals.

The ruble exchange rate traditionally strongly depends on several factors: Russia’s trade balance, open market operations by the Ministry of Finance and the Bank of Russia, operations of Russian exporters who were obliged to repatriate foreign exchange earnings, and the monetary policy of the Central Bank, lists Finam analyst Alexander Potavin. “These are fundamental indicators that work regardless of where the ruble is traded - on the exchange or over-the-counter market,” the expert emphasizes. As before, the exchange rate will be affected by demand and supply of currency, adds Yuri Popov, senior analyst at SberCIB Investment Research. Supply is primarily exports , and demand is imports and capital outflows, he adds.

On the supply side, exporters will remain the main suppliers of foreign currency to the Russian market. According to the current presidential decree, they must repatriate (that is, transfer to their Russian bank accounts) at least 80% of EXPORT earnings in foreign currency. The share of foreign currency transactions in export revenues in April (latest current data) was 59.6%, as follows from the Central Bank’s review of financial market risks. On the demand side for currency, as before, importers will act. As follows from the same Central Bank review, in April the share of foreign currency in paying for imports was 58.5%.

Previously, participants in export-import transactions could either independently enter the exchange for currency transactions or delegate this process to banks. The Central Bank's reviews state that the main agents for the sale of foreign exchange proceeds were systemically important banks. For example, in May they sold proceeds worth 671 billion rubles, the Central Bank estimated. After trading on the stock exchange stops, banks will completely take over all currency transactions.

The very process of transferring exchange activity of currency trading to the over-the-counter market (in May, before the imposition of sanctions, its share already accounted for 58.1% of all foreign exchange trading in Russia) may have an impact on the exchange rate, Potavin admits. “During this period, the activity of currency buyers from importing banks will be relatively low, so the ruble exchange rate will be stronger. While the mechanism of currency trading is being restructured, the exchange rate of the Russian currency can sometimes show high instability, especially in relation to the currencies of developing countries,” says the expert. In general, you shouldn’t expect any kind of collapse of the foreign exchange market and the ruble exchange rate due to sanctions, but you need to be prepared for the fact that in the medium term, problems may appear in the economy and the ruble will be weaker against their background, Potavin adds.

Zeroing out the demand for euros and dollars on the stock exchange from individuals is unlikely to affect the ruble exchange rate in the medium term, since the volume of transactions for this category of investors is approximately ten times lower than the volume of currency sales by exporters, Popov points out. In addition, investors still have the opportunity to purchase euros and dollars in banks, and other currencies on the stock exchange, the expert continues. But the cash currency exchange rate is traditionally worse than the exchange rate, as follows from RBC monitoring data. It is impossible to freely withdraw non-cash currency from a bank account from March 2022 (except for those cases when it was credited to the account before March 9, 2022); banks convert all foreign currency funds into rubles when issued to clients.

A halt to trading on the stock exchange may lead to a reduction in capital outflow, which will be a positive factor for the ruble. “But it is difficult to assess it, since the outflow has already been declining in recent years due to previous sanctions and geopolitics,” notes Popov. The chief analyst of Sovcombank, Mikhail Vasiliev, also speaks about the reduction in capital outflow against the backdrop of the cessation of currency trading on the stock exchange and the potential positive for the ruble from this. There may also be temporary difficulties with imports due to sanctions, the expert admits. “But we believe that these factors can support the ruble for a relatively short time and new work schemes in the changed conditions will be developed quite quickly,” he added.

And before the introduction of sanctions, the ruble was not a freely convertible currency, recalls Natalya Milchakova, leading analyst at Freedom Finance Global. Of the currencies of developing countries included in the basket of the International Monetary Fund, only the Chinese yuan is freely convertible. “The ruble, unlike the freely convertible yuan, is a partially convertible regional currency. That is, foreign trade settlements are carried out in rubles in a number of countries and regions (for example, in the EAEU , BRICS, with some other countries friendly to Russia), but not throughout the world,” explains the expert.

Milchakova believes that the share of the ruble in Russia’s settlements with its trading partners will grow; sanctions against the exchange will not affect this process. “Russia carries out almost 80% of its exports for rubles or with payments in the national currencies of friendly countries. This also means that the authority of the ruble will grow both within the BRICS and among other countries friendly to Russia in the global East and global South. So, in fact, confidence in the ruble as a reliable currency for foreign economic payments will grow,” the expert believes.

The severity of restrictions on financial account transactions can only increase if Russia experiences a significant shock from a decrease in the influx of foreign exchange earnings, says BLOOMBERG economist Alexander Isakov. This could happen due to a sharp slowdown in the global economy, the expert gives an example. “In this case, the Bank of Russia and the government can limit capital outflow in order to maintain the level of imports. Current restrictions do not create risks for the convertibility of the ruble and do not create risks of “multiple exchange rates,” he is convinced.

As for working with the ruble in foreign banks, whose services are used by Russian individuals and legal entities, experts do not see any risks or any difficulties solely due to blocking sanctions against the Moscow Exchange. Although in the first days after the announcement of sanctions, a number of banks from friendly countries reported that they were suspending the acceptance of transfers from Russia.

The risks of working with the ruble in foreign banks grew long before the US sanctions against the Moscow Exchange and its affiliated organizations, says Milchakova. “On the six-month horizon, the market will adapt to new conditions and spreads (the difference between the ruble exchange rate in Russia and abroad) in banks abroad will decrease. The level of these spreads, most likely, has relatively little to do with the operation of the exchange and largely depends on the overall stability of the ruble, the Russian economy and the risks of secondary sanctions that may arise in connection with ruble settlements,” Isakov said.