Image Credits - Newsweek
The Moscow Exchange announced on Thursday the suspension of trading in U.S. dollars and euros. This decision comes in direct response to new sanctions imposed by the United States, aimed at curbing Russia’s ability to finance its ongoing military operations in Ukraine.
The U.S. Treasury Department’s latest sanctions package announced targets over 300 entities across Russia and countries including China, Turkey, and the United Arab Emirates. Notably, the measures specifically hit the Moscow Exchange Group and Russia’s National Clearing Center, a crucial intermediary in foreign exchange transactions.
The Treasury Department asserts that the Moscow Exchange has been instrumental in attracting capital from both Russian and non-Russian sources, thereby providing opportunities for both Russians and non-Russians to profit from the Kremlin’s war machine.
While the full impact of these sanctions will not be felt until August 13, when they take complete effect, the immediate market reaction was palpable. The Moscow Exchange index tumbled 3.5-4% at the opening of trading on Thursday, with the exchange’s shares plummeting by 15%.
Despite the suspension of dollar and euro trading on the exchange, Russian companies and individuals will still be able to conduct transactions in these currencies through banks. The Russian Central Bank has also moved to reassure the public, stating that foreign currency deposits will remain unaffected.
Economists are divided on the potential long-term effects of these sanctions. Sofia Donets, chief economist at T-Bank Investments, believes the impact on the ruble-dollar exchange rate will be limited, forecasting it to remain in the 90-95 range for the remainder of the year. However, she cautions that the evolving sanctions regime increases the risks for Russians investing in alternative currencies and jurisdictions.
Conversely, Alexander Isakov, Bloomberg’s chief economist for Russia, predicts increased volatility for the ruble. He suggests that the sanctions could indirectly affect the exchange rate by altering the neutral ruble rate or the equilibrium ratio of capital outflow to GDP. Isakov also notes that the sanctions are likely to reduce competition in the currency conversion market, potentially allowing banks to widen spreads against customers.
This latest development in the economic standoff between Russia and the West highlights the ongoing use of financial measures as a tool of foreign policy. As the conflict in Ukraine continues, the international community watches closely to see how these sanctions will shape Russia’s economic landscape and its ability to sustain its military operations.