Russia’s invasion of Ukraine triggered a wave of Western sanctions that have frozen more than half of its foreign currency reserves and cut off Russian banks from the global SWIFT network, a crucial tool for international transactions. These constraints have redoubled the urgency of de-dollarization, or moving away from relying on the dollar for trade, experts say.
The Kremlin has tried barter deals, cash payments and other schemes to avoid the dollar. Now, it is focusing on yuan and cryptocurrencies as part of a broader strategy to move beyond the US currency. Using these instruments, Moscow is hoping to limit the impact of new sanctions against it. https://my-forex-group.com/
However, these alternatives introduce a range of risks and vulnerabilities to Russia’s economy. For example, relying on China exposes the central bank to Beijing’s political will, and yuan-based swap lines would be vulnerable to US secondary sanctions on Chinese financial institutions for helping Moscow evade Western sanctions. And even if China doesn’t impose sanctions, it can still limit access to its banks for Russian companies and investors.
As a result, the government is seeking to move more of its foreign-currency earnings into roubles and Indian rupees, a high-level source says. In addition, it is discussing bans on dividend payments abroad and prohibitions on import subsidies for companies that don’t return revenues to Russia in roubles within 90 days of exporting goods. Such measures could hurt businesses in the micro, small and medium-sized enterprises sector, which account for a large share of exports.
The Kremlin imposed similar rules after the ruble crashed 40% against the dollar last year, but lifted them when the currency rebounded. The latest curbs are an attempt to stop the currency from spiralling downwards, hammered by inflation and war costs.
In the meantime, the central bank is stepping up its buying of domestic currency on the market. This will help ease the pressure on the ruble and reduce volatility in the rouble. It is also introducing incentives to boost liquidity in the banking system, including a tax break for depositors. This will allow the bank to buy more assets in the future and support the ruble in the long run. In addition, the Central Bank is reducing its foreign-currency loan rates by up to 4%. This should make the rouble more attractive to foreign investment, which should in turn help boost the country’s exports. This should help counter the decline in oil prices and boost economic growth. However, the overall picture remains grim. GDP slipped in the first seven months of this year, and exports have fallen. The Bank of Russia expects the current account deficit to rise to $35.2 billion in 2023. That is more than double the surplus recorded in 2022. A drop in oil prices, and continued sanctions against Russia, will make it difficult for the country to finance its current account deficit. Despite these challenges, the government is focusing on fighting inflation and boosting investment to offset the effects of sanctions.
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