Russia shifts currency focus as Western sanctions bite

The CBR attributes this change to the redirection of trade flows towards the East and a shift in settlement currencies to rubles, yuan, and other currencies of countries friendly to Russia.

The Bank of Russia (CBR) announced that the yuan/ruble exchange rate will now set the trajectory for other currency pairs on the Moscow Exchange (MOEX). This development comes in the wake of new US sanctions that prompted MOEX to suspend trading in dollars and euros on Wednesday.

The CBR’s statement underscores the growing prominence of the Chinese yuan in Russian financial markets. This shift away from Western currencies is not a sudden development but rather the culmination of a trend that has been gaining momentum over the past two years. The CBR attributes this change to the redirection of trade flows towards the East and a shift in settlement currencies to rubles, yuan, and other currencies of countries friendly to Russia.

The move comes against the backdrop of escalating Western sanctions. The latest round of US restrictions, followed by similar measures from the UK, has targeted the Russian financial system, forcing MOEX to adapt. While dollar and euro trading has been suspended on the exchange, these transactions will continue in the over-the-counter (OTC) market.

Speaking at the recent St Petersburg International Economic Forum, Russian President Vladimir Putin highlighted the declining role of toxic currencies from unfriendly states in Russian exports. He claimed that payments in these currencies have decreased by half, while the share of the ruble in Russia’s foreign trade continues to grow.

MOEX clarified that the suspension affects foreign and precious metals trade, as well as stock and money trading. However, all other financial instruments remain operational, and the derivatives market continues to function normally.

This pivot in Russia’s financial strategy reflects a broader geopolitical realignment. Before the conflict in Ukraine, the US dollar and euro accounted for approximately 90% of Russia’s settlements. Now, faced with Western sanctions, Russia is actively seeking to replace these currencies in its foreign trade.

The long-term implications of this shift are yet to be fully understood. However, it’s clear that Russia’s financial landscape is undergoing a significant transformation, with potential ripple effects on global trade and currency markets. As the world watches, the role of the yuan in international finance may be set for a notable expansion, challenging the long-standing dominance of Western currencies.