Washington’s policies are simply pushing Moscow further along a path it has already embarked on
The endless parade of Western sanctions on Russia barely makes the news anymore. But this week the US Treasury did manage to conjure up something that has generated attention.
In what may be the most ambitious package since the initial wave back in February 2022, the American authorities greatly increased the scope for applying secondary penalties on foreign financial institutions found working with restricted Russian entities, and placed the Moscow Exchange and its clearing house under blocking sanctions, among other measures. The exchange subsequently announced that it was suspending all settlements in dollars and euros. It’s the latter that is the most interesting and has elicited the most chatter.
But, before pursuing this train of thought, let’s dig into the nitty-gritty a little bit and sort out what is actually going to happen to currency trading in Russia.
How currency trading actually works
To trade currencies on the Moscow Exchange, banks and other players send ‘buy’ and ‘sell’ bids to the exchange throughout the day. These buyers and sellers do not trade with each other directly but rather though the exchange’s clearing house, the National Settlement Center (NSC). In the evening, these trades would be settled by the clearing center, which had correspondent accounts in foreign banks for each currency. In other words, currency trading on the exchange involved the participation of foreign banks. It was not an enclosed system such as trading in Russian stocks (where the shares of Russian companies are bought and sold in rubles by investors without the involvement of any foreign entity).
It is exactly this ability to clear currency trades that has been taken away by the new sanctions. American correspondent banks will now be barred from carrying out settlements with the NSC. From a technical standpoint, it is actually the sanctions against the NSC – rather than the exchange itself – that are most sensitive.
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The Russian central bank has stated that currency trading will henceforth take place over-the-counter (OTC), meaning in decentralized fashion. But what is important to understand is that this is hardly a radical move – currency markets across the globe are conducted OTC, so this will in a sense merely bring Russia in line with standard practice. Russia was unusual in that currency trading primarily took place on a centralized exchange, whereas generally currencies are traded through a decentralized network of banks, a system much more flexible than relying on an exchange. The New York Stock Exchange, for example, does not host currency trading.