Foreign currency funds of Russians flow from Russian banks abroad and “under pillows”

— The ban on the sale of the “old” currency was in effect for almost a year and a half. Why did the Bank of Russia introduce it in March last year?

— At that moment it was necessary to reduce the risk of foreign exchange liquidity. And in the event of a repeat of the “raid” of depositors on banks, as happened immediately after the start of the special operation, credit institutions would have a “cushion” of foreign exchange liquidity.

— Why then was the restriction lifted this September?

— Apparently, the regulator is counting on the fact that banks will throw cash currency onto the market and thereby strengthen the ruble, which has weakened significantly over the summer months, especially during the collapse in mid-August. Moreover, the American currency is again insidiously trying to break through the level of 100 rubles per dollar.

— Is it possible to estimate the volume of “old” cash currency, that is, received at bank cash desks before April 9, 2022?

— A rough estimate can be made based on two parameters. The first is the known volume of cash currency on February 1, 2022. Let me remind you that after the start of the SVO, the Central Bank stopped publishing these statistics. So, on this date, the volume of cash currency was $13.7 billion. The second parameter is the increase in the population’s reserves of cash currency for February – March 2022. It amounted to $14.4 billion. I would like to note that the Bank of Russia did not stop publishing statistics on “cushion currency” even after the start of the special operation. However, it is clear that these data are not accurate, since they do not take into account, for example, the import and export of cash currency without declaration. There is an obvious discrepancy: the population received $0.7 billion more than what was in the banks’ cash registers on February 1, 2022.

– Marvelous! Is it really smuggling?

– Hardly. The assistance provided by the Central Bank of the Russian Federation to banks during the acute phase of the currency crisis should be taken into account. It is not for nothing that the regulator, starting in 2015, after the “Crimean spring” and the currency crisis at the end of 2014, accumulated a huge reserve of cash currency: $37.7 billion as of January 1, 2022. Then these statistics also stopped being published.

Immediately after the start of the special operation, the United States and the EU imposed an embargo on the supply of cash dollars and euros to Russia, respectively. So banks could not import cash “toxic” currency from abroad. Planes carrying stacks of cash dollars stopped flying from the United States to Russia.

— The regulator has been constantly lifting currency restrictions in recent months…

– This is true. But there is still a long way to go until complete liberalization of the foreign exchange market. For example, the Bank of Russia extended for another six months, until March 9, 2024, restrictions on the withdrawal of cash foreign currency.

— Do these restrictions apply only to “toxic” currencies?

– No, this is a common misconception. In fact, it applies to all foreign currencies – both “friendly” and “unfriendly”. However, the share of deposits in non-toxic currencies, mainly the yuan, is growing steadily. Accordingly, the share of deposits in “toxic” currencies, mainly dollars and euros, is falling. Thus, as of August 1, 2023, the share of deposits in “non-toxic” currencies reached 15.3%, while on April 1, 2022 it was only 0.4%.

— What negative consequences do restrictions on the foreign exchange market lead to?

— To the outflow of foreign currency funds of Russians from domestic banks and to the flow of these funds to foreign banks. According to the most recently published data from the Central Bank, in January-July 2023, deposits of Russians in foreign banks increased by $9.8 billion, and in Russian banks decreased by $10.7 billion. The flow of foreign currency funds of Russians from ours to foreign banks is one of the consequences restrictions on foreign currency deposits introduced in March last year, when a “semi-freeze” of foreign currency deposits occurred.

— Does this outflow somehow negatively affect the ruble exchange rate? Or is this volume not enough to weaken the national currency?

— The main effect in the weakening of the ruble is not the outflow of private capital abroad, but the growth of imports against the backdrop of a decline in exports.

— Why doesn’t the Central Bank lift restrictions on “friendly” currencies?

– But this is not clear. Apparently, for reasons of simplification of regulation and supervision.

— At the last press conference, the head of the Bank of Russia, Elvira Nabiullina, said that the bankers’ proposal to introduce limits on the withdrawal of ruble funds abroad by individuals is an ineffective measure and “will not work” in terms of influencing exchange rates. Do you agree with this thesis?

– Definitely. Capital will find “holes” in any curtain, even an iron one, so it is better to act not with prohibitions and restrictions, but by creating economic and financial incentives for capital to show patriotism and remain in their homeland.

— Well, what should ordinary Russians do with their foreign currency deposits?

— As long as they are subject to restrictions from the Central Bank of the Russian Federation, it is unwise to open foreign currency deposits in Russian banks. For one simple reason: in March 2022, foreign currency savings were “semi-frozen”, that is, payments from deposits are made not in foreign currency, but in rubles, and in the case of currency receipt from September 9, 2022 – at the bank’s internal (read: arbitrary) rate . Moreover, this restriction has been introduced on all foreign currency deposits – both in toxic and friendly currencies. Foreign currency deposits turned out to be only slightly less dangerous than foreign currency mortgages.

As for foreign currency deposits in foreign banks, there are even more problems. Firstly, in fact, in many foreign countries, persecution of Russians began in one form or another, regardless of their political position, status and other factors. Russian passports are looked at askance in many foreign banks, Russians are being “squeezed out” from the global financial space. Secondly, the “iron curtain” is increasingly hanging over Russia, in particular due to sanctions, and a situation may arise where you are here, and the money is there, “over the hill”, and you have to reach, fly or crawl to your you won’t have any more money.

However, no one has yet canceled currency diversification. Risks, including currency risks, must be reduced; we cannot “put all our eggs in one basket.” Since foreign currency deposits in Russian banks carry great risks, Russians have to go into cash. This is what we are seeing.

— Is it worth giving up dollars and euros?

— From cash? Not worth it. Likewise, you should not buy yuan in cash unless absolutely necessary. We should not forget about eternal values: gold and other precious metals.