Big news leaking out of Moscow last week points to a likely aggressive program of buying by Russia of so-called ‘friendly currencies’, namely those of countries that have not joined the Western sanctions regime. First and foremost among these is China of course. Russia is known to also be keen to bring down the overall value of the Rouble.
Bloomberg reported last week on high level meetings, including Russia’s central bank, which would approve a plan to buy as much as USD 70bn in foreign currencies. Russia has been having difficulty in accessing international financial networks since it was cut out of SWIFT following its invasion of Ukraine back in February. This has led it to rely more heavily on the yuan.
News of the scheme has already provided some upside on both the yuan market and also the Turkish lira. Russia had accumulated substantial forex reserves in anticipation, it seems, of foreign sanctions once it launched its invasion. It did not anticipate the reach and scope of the international sanctions it has now been exposed to.
A cheaper rouble will also give more money to the Russian government, as the country’s oil revenues are denominated in USD which it then converts into RUB.
Considerable issues remain with the plan: buying and selling large chunks of yuan in the market has the scope to upset Chinese monetary authorities, as the yuan market is simply not as liquid as the USD market. Russia is thought to be planning to buy as much as USD 180 bn in yuan, but it will likely have to do this over a considerable period of time. The market for Turkish lira and Indian rupees is going to react to these sorts of volumes.
CNY had dropped to the 8.6 mark against the RUB around 20 August, but has since strengthened to around 8.73. We are seeing activity relatively rangebound going into the week. CNY has been weakening versus USD, developing an interesting trend since mid-August, but again hit as range at the end of the month. The market had been selling CNY on the back of fears of Chinese economic activity weakening again, and further Covid lockdowns in China.
The economic picture for Russia
Reliance on Russian energy exports, particularly in Europe, has provided a windfall of oil and gas revenues for Russia over the past six months, particularly as the war sent global oil prices surging.
Still, the unprecedented scale of Western economic sanctions is hitting Russia’s economy hard.
“Russian imports are being pummelled because Brussels and Washington have sanctioned Russian firms, and foreign companies have fled en masse,” Eurasia Group said in a note to fund managers last month. “This has driven up the cost of key commodities, further exacerbating inflation at home. Staples such as cooking oil, sugar, and medicine have become scarce, with European and American pharmaceutical companies limiting some exports to Russia.”
Meanwhile, the import crunch has pummelled Russian industry, particularly car production, with manufacturers unable to get their hands on key parts. In the single month of May, for example, Russian car production slumped by 97%. As a result, the Kremlin has taken steps to try and boost domestic manufacturing, but a surge in production takes time … and rubles that Russia is currently pumping into its war machine.
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