The war in Ukraine has accelerated Russia’s pivot east and sent local demand for China’s yuan surging, helping tame a four-month ruble rally that’s piled pressure on companies and the budget.
Trading volume in the yuan-ruble pair increased to the highest ever this week and hit a daily record of 7.82 billion yuan ($1.16 billion) on Wednesday, according to Moscow Exchange data. Volumes for the yuan-ruble currency pair are now higher than for the euro-ruble pair, the figures show. The ruble is this month’s worst performer against the dollar among 23 emerging-market currencies tracked by Bloomberg.
Sweeping sanctions since the invasion of Ukraine have cut Russia off from global markets, making dollar and euro investments toxic for local investors. The government has suggested buying the currencies of so-called friendly nations to cool the ruble’s surge this year, but there’s no indication that the latest jump in yuan trading was due to coordinated interventions.
“Not only Russia’s government, but also private and institutional investors, participants in foreign economic activity are interested in avoiding external infrastructure risks,” said George Vaschenko, the head of Russian stock-market operations at Freedom Finance LLC. “They are actively shifting to currencies other than the dollar and the euro.”
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The Bank of Russia didn’t immediately respond to a request for comment.
Despite Russia’s isolation, its currency had been on a tear since February. Companies continued to convert billions of dollars of revenue from energy exports into rubles, while currency controls and collapsing imports meant there was little appetite for the greenback.
The ruble touched its strongest level in seven years years last month, stoking concern the gains would hinder companies’ competitiveness and reduce budget revenue from exports in local-currency terms.
Ruble as Rubble?
But appetite for the yuan, as well as a bigger-than-forecast rate cut last week, appear to be cooling a rally that undermined US President Joe Biden’s assertion that sanctions had turned the ruble into “rubble.”
The onshore currency fell more than 16% in July, snapping a four month run of gains against the dollar. The volume of yuan-ruble trading reached more than 100 billion yuan ($14.8 billion) in July compared with 54 billion yuan ($8 billion) in June, according to Bloomberg calculations based on Moscow Exchange data.
“The dollar gained through cross-currency effects,” said Egor Zhilnikov, chief analyst at Promsvyazbank PJSC. “Pay attention to the yuan-ruble pair, and you’ll see the Chinese currency strengthened more significantly when trading volumes were at a record.”
At the end of June, Finance Minister Anton Siluanov said the government is considering reviving a version of its pre-war fiscal rule to divert energy earnings into foreign exchange, thus indirectly weakening the ruble. The new approach would target currencies not hit by sanctions. He didn’t specify what currencies might be considered.
Governor Elvira Nabiullina said last week that the Bank of Russia is ready to start purchases under the budget rule as early as this year.
Andrey Kochetkov, a dealer at Otkritie Bank FC in Moscow, suggested that the government may already be in the market.
“The trading volume almost doubled over the past month, while we can’t yet talk about such a strong recovery in imports,” he said. “So it seems that the participation of the authorities in foreign exchange trading is the most likely reason” for the ruble’s weakness, he said.
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