New U.S. Sanctions Sever Russia’s Ties to Global Financial System

The United States has imposed significant new sanctions on the Russian Federation, aimed at severely limiting the capabilities of the Russian economy.

These measures, which now include the Moscow Exchange (MOEX.MM) and the National Clearing Centre, effectively exclude Russia from the global financial system.

This move directly impacts Russia’s ability to trade in U.S. dollars, contributing to a form of “de-dollarisation” that President Vladimir Putin had ironically aimed for.

Impact on the Moscow Exchange

The sanctions have led to the immediate suspension of dollar and euro trading on the Moscow Exchange, Russia’s principal financial marketplace.

The central bank announced, “Due to the introduction of restrictive measures by the United States against the Moscow Exchange Group, exchange trading and settlements of deliverable instruments in U.S. dollars and euros are suspended.”

This forces banks, companies, and investors to conduct transactions in these currencies over-the-counter (OTC), rather than through the central exchange. OTC trading lacks the oversight and benefits provided by a central exchange, such as liquidity and clearing.

The immediate suspension is expected to impact the Moscow Exchange’s profitability by reducing trading volumes. In May, MOEX saw a total trading volume of 126.7 trillion roubles ($1.43 trillion), a significant increase compared to the same month the previous year.

For 2023, MOEX reported a net profit of 60.8 billion roubles, marking a 67.5% year-on-year increase.

Russian Economic Resilience

In anticipation of such measures, the Russian central bank had been preparing for approximately two years. It had previously modelled various sanction scenarios with foreign exchange market participants and infrastructure organisations.

As noted by Russian broker T-Investments on Telegram, “This is bad, but expected news.”

The broader implications of these sanctions suggest that Washington is drawing new “red lines” in its relations with both Moscow and Beijing.

President Joe Biden and his administration appear to recognise that Russian President Vladimir Putin perceives Western reluctance to escalate tensions as a sign of weakness rather than a desire for diplomatic resolution.

Consequently, the U.S. is now enforcing stricter measures to curtail Russia’s economic resilience and deter further support from China.

Since the imposition of Western sanctions over the past two years, Russia has showcased a degree of economic resilience, attributed to the strategic management of its financial sector by figures such as Central Bank Governor Elvira Nabiullina.

However, this resilience has often relied on continued oil revenues and the ability to trade in dollars. With the U.S. closing these avenues and tightening sanctions, the effectiveness of Russia’s economic strategies will be severely tested.

Chinese Companies Also Targeted

The latest sanctions extend beyond Russian entities. They also target Chinese companies, including those operating in Hong Kong, a Special Administrative Region of China known for its distinct economic policies.

This action follows warnings from U.S. Secretary of State Antony Blinken during his visit to Beijing, where he cautioned that Chinese firms aiding the Russian military-industrial complex would face consequences from the U.S.

Despite these warnings, it appears that Chinese President Xi Jinping did not heed the U.S. concerns, leading to the imposition of these sanctions.

China’s economy, already facing challenges, now encounters additional pressures as a result of these U.S. measures. Stability and growth, key priorities for Xi Jinping after his unprecedented third term re-election, are now at risk.

Economic Shifts and De-dollarisation

In response to the sanctions, Russia is likely to further its efforts towards “de-dollarisation.” This includes increasing reliance on the Chinese yuan, which has already become the most traded currency on MOEX, accounting for 53.6% of all foreign currency trades in May.

Yuan-rouble trading volumes now regularly exceed 8 billion roubles daily, significantly surpassing dollar and euro trading volumes.

The U.S. Treasury explained that the sanctions aim to “target the architecture of Russia’s financial system, which has been reoriented to facilitate investment into its defence industry and acquisition of goods needed to further its aggression against Ukraine.”

Market Reactions and Future Implications

The new sanctions have caused significant fluctuations in the currency exchange rates offered by Russian banks.

For instance, Norvik Bank initially quoted a stark disparity, buying dollars for 50 roubles and selling them for 200 roubles, before adjusting to a more moderate range of 88.20/97.80.

Tsifra Bank set its rates at 89 roubles to buy and 120 to sell dollars. Other major banks maintained narrower spreads of 6-7 roubles between buy and sell rates.

Yevegeny Kogan, an investment banker and professor at Russia’s Higher School of Economics, advised against panic, warning on Telegram, “You know, it’s genetic for us – if we’re scared, we run to buy currency. And it doesn’t matter whether it’s 100, 120 or 150. You mustn’t rush,” cautioning that ignoring this advice could lead to severe consequences. “Friends, it looks like tomorrow will be a very nervy day,” he added.

As these sanctions take effect, the international community will closely watch the economic and political responses from Moscow and Beijing.

The effectiveness of these measures in curbing the actions of both countries will have significant implications for global geopolitics and the future of international economic relations.

The coming months will reveal whether these sanctions can compel meaningful changes in the policies of Russia and China or if they will lead to further escalation in global tensions.

Read also:

US Secretary of State Blinken Accuses China of Being Russia’s Primary Military Complex Supplier

Click here for more News & Current Affairs at EU Today

_________________________________________________________________________________________________________