The U.S. sanctions imposed on June 12 against the Moscow Exchange and its clearing entity, the National Clearing Center (NCC), are set to cause massive disruptions in the Russian currency market, according to FX industry veteran Sergey Romanchuk.
The sanctions, which prohibit American citizens and companies from engaging with these entities, were expected but still came as a surprise due to the lack of prior leaks. The Bank of Russia and the Moscow Exchange had contingency plans in place, leading to quick responses from both institutions.
MOEX today announced the suspension of trading in delivery instruments and settlements for dollar and euro trades, while the central bank assured that the domestic interbank currency market would continue operating, with funds in US dollars and euros remaining secure.
Romanchuk, who has three decades of leadership in FX and money markets, pointed out the deep implications of these sanctions. He stated, “The calm speeches of the regulator and the trading organizer hide behind them tectonic changes in the market infrastructure, which will almost instantly make a phase transition to a state comparable to that of the early 1990s.” The Russian currency market, which had evolved from a diversified interbank market to a nearly fully centralized one, faces a rollback to a less advanced state.
The sanctions have essentially severed the central clearing function of the NCC, which has been the cornerstone of the market. Romanchuk explained, “Deals made on alternative electronic platforms were largely still settled through the Exchange.” Now, with this link broken, the market will face segmentation. Non-sanctioned banks will avoid direct dealings with sanctioned banks, leading to fragmented trading and increased difficulties in market operations.
One immediate impact is the suspension of trading in spot market delivery instruments in dollars and euros. The forward currency market will continue but without a transparent connection to the basic asset market. This disconnect will disrupt classical price formation models. “Market participants will be forced to close positions on futures due to the severed link to spot trading,” Romanchuk noted.
The sanctions are expected to lead to multiple exchange rates and increased spreads. “In the coming days, we may see significant exchange rate fluctuations, and the spreads – the difference between the bank’s buy and sell rates – will widen significantly,” Romanchuk predicted. The long-term effects include a decrease in dollar and euro trading volumes and a shift towards the yuan, though this too faces risks if Chinese banks cease operations with the NCC to avoid secondary sanctions.
Romanchuk also expects a revival of voice interbank brokers due to the complexity of direct settlements between banks and potential segmentation of the market. He warned that the overall impact would degrade and shrink the Russian currency market. “The Russian currency market, as we knew it, will never be the same,” he concluded.
