How the war in Ukraine changed the ruble market

In two months, the ruble changed from the weakest to the strongest currency due to its care on the part of Russia behind the “iron curtain” (high rates, control over capital, etc.). It rose 12% against the dollar and 21% against the euro. But this impressive rise was accompanied by a complete drying up of the market.

Before the war in Ukraine, the ruble was an emerging currency, liquid, with large amounts, which the treasurers easily insured. In London, the world’s leading foreign exchange market, the dollar-ruble pair ranked 11th in 2021 with $ 35-40 billion a day for all foreign exchange products together (spot transactions, derivatives). In second-ranked New York, it traded between $ 3.5 billion and $ 5 billion a day in spot trading, a market dominated by banks, hedge funds and asset managers. After international sanctions, all these types of players are much less present and active in Russian currency.

According to Goldman Sachs, dollar-ruble transactions (in Russia and abroad) have split by 5 since mid-February. “No Western bank risks quoting the ruble in significant amounts. This is the decision of their leadership, who do not want to risk keeping the rubles under sanctions and their possible strengthening in the event of a protracted war, “said Sullivan Joubert, head of trade at Ebury France. French banks went further, deciding not to process the ruble for their customers while the war lasted.

Falling liquidity

“For their operations with the ruble, the treasurer chooses banks that are able to process this currency and provide settlements and delivery within the framework that complies with international sanctions. Not all banks can buy and sell rubles and provide liquidity to their customers, ”said Severin Prizer, head of sales for Citi’s corporate customers in France, Belgium and Luxembourg. Banks that are still active are adjusting to falling volumes. If the client asks for 1 billion rubles, he will divide this order and process it into 4 transactions of 250 million rubles to reduce your risk. It is really easier and less risky for them to find 250 million in the illiquid market.

Zero stock

Despite the rebound of the Russian currency, with the dollar below 70 rubles, banks do not want to take risks (volatility, possible recurrence, temporary non-convertibility) and maintain the logic of zero reserves. Thus, at the end of the day they should not keep more rubles or a minimum. The Russian government has also decided that Western banks can no longer withdraw rubles, which limits their ability to sell rubles to their customers.

Before the war, the bank could have a mismatch between the payments it had to make to its customers in rubles and what it received from other customers. If, for example, a customer was late in paying in rubles, his European bank turned to its Russian correspondent bank or to its Russian subsidiary, which then transferred the rubles to him. This is no longer possible. In Russia, access to credit remains limited, despite recent Bank rate cuts.

Financial conditions (access to various financing in rubles) “are even stricter than at the time of the March 15 sanctions. The rebound of the ruble creates a deceptive impression of a return to normal life. Half of this increase is due to decisions such as capital controls, and does not reflect an improvement in the economic outlook, as we estimate a 15% drop in activity this year, ”said Robin Brooks, chief economist at the Institute for International Development, on Twitter. finances.