“Strong” ruble is experiencing a crisis of confidence?

In July, Russian banks bought foreign currency on the domestic market for a record amount of 319 billion rubles. The volume of purchases of foreign currency by individuals from 176 billion rubles in June increased in July to 237 billion in ruble terms. And this is also a record …

Garegin Tosunyan, President of the Association of Russian Banks, Academician of the Russian Academy of Sciences, spoke about what all these records mean during a press conference at the NSN:

“Foreign currency was purchased mainly through banks that made transfers to foreign accounts, as a result, in July there was a decrease in bank account balances in foreign currency by $3 billion. But this is due, among other things, to the expectations that the procedure for withdrawing their foreign currency funds will become more complicated, the expectations that these transfers will be subject to commissions, and, indeed, at the end of July, the vast majority of banks increased commissions for transfers. <…> Cash currency is now in great demand, because people prefer to make payments in foreign currency, and not only because they go somewhere, but simply when making some transactions.”

As the president of the Association of Russian Banks explained, under such conditions, the continued “strength” of the ruble exchange rate is largely due to the fact that exporting companies continue to sell a significant part of their foreign exchange earnings on the domestic market:

“Even after the abolition in June of the mandatory sale of 50% of foreign exchange earnings, a significant decrease in the sale of earnings was not recorded. So, if in March they sold 70% of foreign exchange earnings, in April – 61%; in May – 54%, then in June – 64%.

This is explained by the fact that in the context of sanctions restrictions on imports to Russia, this currency (dollars and euros) simply has nothing to spend on. Under the current conditions of capital movement restrictions and restrictive sanctions for Russian companies engaged in foreign economic activity, there is some flow of funds in yuan, acting as an alternative currency, which can be used to make payments for imported goods.

“Banks began to offer to open accounts in Chinese currency. The yuan gains popularity in trading on the Moscow Exchange; the volume of transactions in yuan is growing; deposit rates reach up to 3%; bonds in yuan appeared on the Moscow Exchange,” said Garegin Tosunyan.

But at the same time, it should be taken into account, as another participant in the press conference, the director of strategy at the investment company FINAM, Yaroslav Kabakov, noted that “the yuan is not a completely convertible currency, its exchange rate is largely regulated by the monetary authorities of China and, quite likely, that with the economic slowdown that we are already seeing, the yuan could be devalued to some extent.”

In such conditions, according to Yaroslav Kabakov, it is quite understandable why people prefer to keep their savings in a truly hard currency (dollars and euros):

“Everything is very simple: if in previous years we had a devaluation of the ruble by 50-70%, that is, the volatility was insane, then why should the population trust the national currency in these conditions? This is the first moment. The second point is related to the fact that we are now going through a certain period (most likely short-term) associated with high prices for hydrocarbons, so the inflow of export earnings into the Russian economy is unprecedentedly high. But the situation may change dramatically when hydrocarbon prices collapse against the backdrop of a slowdown in the global economy. In this situation, the ruble can quickly win back the current strengthening and show the reverse dynamics that it showed at the end of February 2022. Therefore, it is understandable that our population seeks to protect itself from such possible risks in advance.”

Although, as I would like to add, the monetary authorities of the Russian Federation are doing everything possible to reduce the “popularity” of these “toxic notes”, as Russian Finance Minister Anton Siluanov recently put it, referring to US dollars. Following this line, many banks are already offering negative interest rates on foreign currency deposits, while the population, meanwhile, continues to buy up foreign currency, apparently intending to keep it “under the pillow” for a rainy day…

Sergei Ishkov.

Photo by Alena Bodrienko