Russian authorities are trying to increase the liquidity of the markets of friendly countries

Banks and brokers from friendly countries may in the near future be allowed to participate in organized foreign exchange trading in Russia. Now only Russian residents, as well as banks from the EAEU countries, are allowed to trade. Attracting new financial institutions may increase the liquidity of such currencies as the Turkish lira, the UAE dirham, the Indian rupee, etc. However, the liberalization of domestic regulation may not be enough, as much will depend on the political will in these countries.

The Russian authorities are taking measures to increase the liquidity of currencies from friendly countries traded on the Russian exchange market. On Tuesday, June 20, the State Duma adopted in the second reading bill, amending the law “On organized auctions” and a number of other legislative acts. The changes being introduced will liberalize access for credit institutions and brokers from friendly countries to organized trading in foreign currency, as well as derivative financial instruments, the underlying asset of which is currency and interest rates. The list of such jurisdictions will be determined by the government.

Currently, operations with currency and derivatives can be performed by banks and brokers licensed by the Central Bank, a limited number of Russian legal entities, the NCC, the Bank of Russia itself, and the Federal Treasury. From foreign banks, such operations can be performed by credit institutions from the countries of the Eurasian Economic Union (EAEU). According to the explanatory note to the bill, 21 banks from the EAEU member countries and Tajikistan are currently participating in foreign exchange trading on the Moscow Exchange.

Taking into account the reorientation of the Russian economy from West to East and the rejection of the currencies of unfriendly countries in favor of “friendly currencies”, the issue of increasing their liquidity to meet the growing demand of participants in foreign economic activity is urgent.

A sufficient level of liquidity is present only in the yuan, the daily trading volumes with which have grown several dozen times since February 2022, to more than 110 billion rubles. According to this indicator, they are slightly inferior to the US dollar, but more than double the trading volume of the euro.

In other currencies of friendly countries, the volume of trades, although increased, is still negligible in comparison with the trade turnover between the countries. This applies not only to currencies such as the Turkish lira, but also to the currencies of the EAEU countries, some of whose banks are listed on the Moscow Exchange. Thus, daily trading volumes in the Belarusian ruble in May averaged about 200 million rubles, in Kazakhstani tenge – 1.3 billion rubles. According to the head of the analytical department of Zenit Bank Vladimir Evstifeev, the limiting factor is an insufficiently wide range of instruments in these currencies, which, in turn, “is caused by a small number of foreign counterparties in the Russian market.”

If the adoption of this law will result in an increase in the number of foreign financial companies in the domestic market, this will allow more comfortable use of alternative currencies, obtaining the necessary hedging and trade financing tools, Mr. Evstifeev notes. As a result, the costs of conversion operations for businesses will decrease, as will the cost of hedging currency and interest rate risks. According to the chief analyst of Sovcombank Mikhail Vasilyev, the most promising currencies (in addition to the yuan) are the UAE dirham and the Indian rupee, since the Russian Federation has significantly increased trade turnover with these countries. “The currencies of Turkey and South Africa are also promising due to good political relations and the active development of trade,” Mr. Vasilyev notes.

However, easing access alone may not be enough to actively attract new players to the market. According to Mikhail Vasiliev, the actual attraction of banks and brokers from friendly countries to the Russian market will largely depend on the political will in these countries. The development of settlements in national currencies, bypassing the dollar, undermines the hegemony of the American currency and allows you to bypass the current sanctions restrictions of the West. Therefore, the US and its allies will put pressure on China and other countries to prevent the circumvention of sanctions. “The US and the EU are more important trading partners for China, India, Turkey and the UAE than Russia. Therefore, they cannot afford to completely ignore Western sanctions, despite good relations with Russia,” Mr. Vasilyev said.

Vitaly Gaidaev