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Nearly six months after Russia was kicked out of most global financial markets for its invasion of Ukraine, it went it alone by designing a two-tiered system that was cut off from its adversaries.
The plan, which stems from the central bank’s proposal and the gradual lifting of local restrictions, will focus on mobilizing capital domestically while catering to jurisdictions it deems friendly.
Starting Monday, the Moscow Exchange will allow debt securities to be traded by investors in countries that have not joined sanctions imposed by the United States and its allies. The decision ended a hiatus since Russia blocked its markets in late February when the war began to limit money flowing out of the country.
But recovery will not start from “unfriendly” countries, which are still subject to capital controls that prohibit foreigners from selling or receiving payments on local securities. As of last year, the group — which includes countries ranging from EU member states to Canada and Japan — accounted for about 90 percent of Russia’s total portfolio .
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“In the beginning, it was the capital controls necessary to stabilize the situation,” said Christopher Granville, managing director of global politics research at TS Lombard in London. “But now it’s more about not being able to do these unprecedented sanctions in the West. A matter of principle of relaxation.”
It’s the latest example of Russia’s increasingly assertive stance to distinguish friend from foe.
This month, President Vladimir Putin banned some foreign banks and energy companies from withdrawing from operations in the country. Another decree allows Russian lenders that freeze foreign exchange to stop doing business with corporate clients in those currencies. Russia’s sovereign wealth fund may now invest in the currencies of countries including China, India and Turkey after fines blocked euro and dollar purchases.
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“Given this situation, it is necessary to develop trade and financial relations with countries that are ready to cooperate with Russia,” said Oleg Vyugin, a former senior official at Russia’s central bank and a finance ministry official.
Finance became a new front in the fight against Russia almost immediately after Putin ordered troops into Ukraine on February 24.
To punish the Kremlin, foreign governments have imposed trade and financial sanctions, frozen about half of their central bank’s reserves and removed many of its banks from the SWIFT global information system.
With the yuan and gold alone unable to defend the ruble, the central bank took emergency measures such as capital controls to reassure investors.
new normal
But as the domestic market appears to have weathered the storm, Russia is turning a new leaf.
An unexpected plunge in energy revenues and imports helped the ruble rebound, allowing authorities to lift restrictions on capital controls. Local bond yields returned to pre-war levels.
It was unclear how Monday’s partial reopening of domestic markets would affect investors from hostile jurisdictions looking to divest their holdings of local currency debt. Even now, investors are still likely to sell their holdings, despite depressed prices, said Viktor Szabo, a fund manager at London-based Abrdn.
Onshore-offshore ruble exchange rate convergence
As the market recovers, authorities are watching how the financial system works without an adversary as OFZ.
In response to what it called an “unusual change of circumstances,” Russia’s central bank released a public discussion report that listed numerous innovative measures to help.
look inward
Policymakers are looking inwards for floating concepts such as funding sources, charitable bonds and participation in financing.
According to the central bank, other proposals are aimed at deterring companies from using “toxic” currencies, and state-owned enterprises should convert their foreign exchange holdings into the currencies of “friendly” countries.
“The turnaround in the financial system is likely to be gradual,” said Sofya Donets, an economist at Renaissance Capital. “If it happens suddenly, then it will have a big impact on the economy.”
But even as some investors gain more access to domestic markets, it’s a reminder of the challenges ahead.
A year ago, non-residents from “friendly” countries accounted for only 5%-10% of foreign OFZ holdings, a proportion that Otkritie Research’s Vladimir Malinovskiy called “insignificant”.
“It’s not about facilitating more offshore transactions,” Abdn’s Szabo said. “It’s more about showing a willingness to get back to normal.”
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