After the suspension of the US dollar's on-site trading, why did the Moscow yuan fall to a new low in a year against the ruble?

Mars macroscopic

2024-06-20 00:58Published in Hunan Finance and Economics Creator

Executive Summary:

The renminbi fell 6.3 percent in four trading days after Moscow gave Russia a benchmark for foreign exchange rates. Russian media believe that the expansion of Russia's trade surplus with China, which has led to an increase in the supply of RMB, is the reason for the abnormal phenomenon of the RMB exchange rate. Russia's balance of payments and Sino-Russian trade data do not support the sharp depreciation of the yuan in the past few days, and it is likely that the Central Bank of Russia intends to suppress the yuan in order to raise the ruble exchange rate.

1. The renminbi fell 6.3% in four trading days after Moscow gave Russia the task of benchmarking its foreign exchange rate.

Due to the US announcement the day before the sanctions against the Russian National Clearing Center, the Moscow foreign exchange trading platform and other institutions, on Thursday, June 14, the Central Bank of Russia announced that the Moscow Foreign Exchange would stop the exchange of the US dollar and the euro, and specifically stated that the yuan will become the main currency of Russia, and the exchange rate of the yuan against the ruble will set the trajectory of the exchange rate of other foreign currencies in Russia and will become the benchmark for market participants.

In this regard, many of us believe that this means that Russia's high dependence on the yuan has become a foregone conclusion, which is of course a good thing for the yuan.

The alumni forum of Beijing Qingjiao also issued an article that the renminbi has now become the key currency of Russia's exchange rate market, which means that the renminbi has been given more important responsibilities by a major economic power in the world ---- Russia.

However, the treatment and performance of the renminbi in Moscow in the days after it has taken on a new role may surprise those who hold similar views. Because, along with this new role, the exchange rate of the yuan against the ruble continues to fall sharply!

On Friday, the first day after the suspension of on-exchange trading of the dollar and the euro and the switch to off-market trading, the yuan on the Moscow Exchange weakened significantly against the ruble, and the yuan fell 0.58% to 12.15 yuan per ruble.

On Monday, the second trading day, the yuan fell another 0.2% against the ruble to 12.1321.

On Tuesday, the third trading day, not only did not stop falling, but also entered a sharp decline mode, falling 3% to 11.7646.

On Wednesday, the fourth trading day, it continued to plunge 2.2% to 11.5063. The intraday low fell to 11.3642 on Wednesday, the first time since June 8, 2023, that the yuan fell below 11.5 rubles.

The renminbi fell 6.3 percent against the ruble in four trading days compared to the day the dollar was halted last Thursday. Compared to the end of May, it fell by 7.8%. Compared to the end of last year, it fell by 8.6%.

In fact, since October last year, the yuan has started a negative decline on the Moscow foreign exchange exchange. However, what is surprising is that the exchange rate of the renminbi against the ruble after the suspension of the exchange of the US dollar on the Moscow Exchange and the announcement by the Central Bank of Russia as the benchmark for Russia's foreign exchange rate not only did not rise as a result, but accelerated its decline.

2. The Russian media believe that the expansion of Russia's trade surplus with China, which has led to an increase in the supply of the renminbi, is the reason for the abnormal phenomenon of the renminbi exchange rate.

On June 18, SberCIB analysts, an exchange rate analyst at the Russian state-owned bank, expressed their opinion on the Telegram channel that yesterday, the price of the ruble rose by 1.7% against the yuan. The exchange rate of the yuan against the ruble has fallen sharply, and the ruble is rapidly strengthening. The reason for this anomaly is the problem of import payments, where importers become less active. All this is due to the sluggish demand for the currency. Recent sanctions may complicate import payments. The situation was aggravated after the United States imposed sanctions on the Moscow Exchange.

Analysts at Promsvyazbank also believe that the new package of US sanctions may lead to increased pressure on imports, which are the basis of foreign exchange demand. The risk of secondary sanctions against Russian counterparties is increasing significantly. In this case, the ruble may continue to strengthen against the yuan - by the end of June, it is possible that the ruble will enter the range of 11-11.5 rubles. In order to balance the situation, the Central Bank of Russia may refuse to sell the yuan in the second half of the year.

Raiffeisenbank analysts warn that in the long term, the sanctions regime will continue to have a general negative impact on foreign trade. At the same time, in the coming quarters, the impact on imports is likely to be greater than on exports: "If the issue of payment difficulties is not resolved, imports will continue to weaken".

At the end of May, the chief analyst of FG Finam, Alexander Potavin, also spoke about the strengthening of the ruble due to the risk of secondary sanctions from the United States, which led to a decrease in Russian imports, an increase in the import and export surplus, and a better balance of payments.

3. Russia's balance of payments and Sino-Russian trade data do not support the sharp depreciation of the RMB in the past few days, and it is likely that the Central Bank of Russia intends to suppress the RMB in order to increase the ruble exchange rate.

According to the above-mentioned Russian analysts, Russian exports remained stable due to US sanctions, but imports fell, leading to an increase in the trade surplus, which supported the growth of the ruble exchange rate.

Indeed, according to the balance of payments estimate for May 2024 disclosed by the Central Bank of Russia,

Russia's foreign trade surplus in goods increased to $56 billion in January-May from $47.6 billion in the first five months of 2023 from $47.6 billion in the first five months of 2023, "due to a greater decline in imports compared to exports".

But the trade surplus fell to $10.7 billion in May from $10.6 billion in April.

Saburo also noted that according to data from Chinese customs, the trade deficit between China and Russia was $7.913 billion from January to May last year and $12.931 billion from January to May this year. But the trade deficit in May has fallen to $1.641 billion from $3.131 billion in April.

Data from the Central Bank of Russia and customs data explain that the ruble appreciated this year compared to last year, but in the same way, the ruble should have depreciated in May compared to April. Because Russia's trade surplus in May was lower than in April.

By the same logic, if the renminbi depreciates against the ruble this year because of the widening trade deficit, the trade deficit in May will be significantly lower than in April, and the renminbi should appreciate against the ruble.

Therefore, this logic is in line with the theory of the relationship between the balance of payments and the exchange rate, but it cannot explain why the exchange rate of the renminbi against the ruble has been depreciating in May and June.

As we all know, Russia has been using forced foreign exchange settlement to regulate the amount of foreign exchange sales to protect the ruble exchange rate. Therefore, in fact, the ruble exchange rate is not only affected by the balance of payments and trade surplus, but also, to a greater extent, by the artificial manipulation of the exchange rate by the Central Bank of Russia.

Especially after Russia stopped the on-exchange trading of the dollar and the euro last Thursday, the sales price of the ruble against the dollar exceeded 132, which was nearly 60% higher than the central price announced by the Central Bank of Russia. It is reasonable to speculate that the Bank of Russia artificially suppressed the RMB exchange rate and used the RMB-US dollar exchange rate mechanism to restrain the over-the-counter runaway USD/ruble exchange rate. Otherwise, the yuan fell 6.3% against the ruble in 4 trading days, which cannot be explained.

Compared with last Wednesday, the renminbi fell only 0.3% against the dollar, and the renminbi rose 0.3% against the euro. This further validates speculation that the renminbi fell 6.3% against the ruble last Wednesday, mainly due to the artificial suppression of the Russian central bank.

After the US dollar and euro cannot enter the exchange trading, according to Russia's interests, it may be the daily work of the Russian central bank to reduce the cost of obtaining the Russian government by suppressing the yuan to obtain the dollar and euro.

Alexei Tretyakov, founder of Russia's Ari Capital Management Company, is aware of the problem, as is Saburo.

Tretyakov believes that although the yuan depreciates not only against the ruble, but also against the dollar, the discount of the yuan exchange rate relative to the global exchange rate is only about 1.5%, but against the ruble it has fallen by about 8%. This is clearly not normal.

In his opinion, earlier, there was a layer of intermediaries between exporters who sold yuan on the Moscow Exchange and importers who had a demand for dollars and euros for less than 1%. But after the dollar was expelled from the exchange, the procedure has now become more complicated. Because of the information vacuum, in addition to the problems with the open trading quota for OTC interbank transactions, and the fact that banks that retain the ability to transfer money in Western currencies are not ready to cooperate with sanctioned persons in principle. All this, most likely, will increase the discount of the yuan against the ruble by a few percentage points.

Therefore, Saburo needs to remind companies that continue to trade with Russia to pay attention to the fact that Russia and its friendly countries have basically implemented local currency settlement. This leads to the fact that if the ruble appreciates, first, it will be beneficial for Russia to increase foreign exchange earnings from exports; second, it is conducive to reducing the price of imported goods in Russia and helping to curb domestic inflation; Third, it will help increase Russia's international comparative advantage after converting economic indicators into dollars, and will help Russia become richer and richer in internal and external narratives.

But for our importers, it is equivalent to an increase in import costs, and for our exporters, it is equivalent to a reduction in export revenues.

In particular, the continuous depreciation of the renminbi against the ruble is considered to be detrimental to the basic stability and international credibility of the renminbi, and will also put depreciation pressure on the renminbi and other currencies.

[Author: Xu Sanlang]

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Personal opinion, for reference only