Russia is considering buying as much as RUB4.4 trillion worth ($70bn) of currencies from “friendly” countries that have not joined the Western sanctions regime, Bloomberg reported on September 1, citing a Kremlin document detailing the plan that has not been made public.
The plan would relieve the upward pressure on the ruble which has become a problem for Russia, bringing the rate down from the current RUB60 to between RUB70-80 by the end of the year, say analysts.
A weaker ruble would also increase the amount of cash the government has to spend. One of the quirks of the Russian budget is that while expenditure is denominated in rubles, its oil revenues are denominated in dollars and then converted to rubles. That means if the ruble devalues, converting dollar oil revenue creates more rubles for the government to spend. Oxford Analytics estimates a RUB10 fall in the exchange rate will generate an extra RUB 1.2 trillion ($20bn) for the budget.
The yuan is the favoured currency and Russia already has the largest share of yuan in its reserve basket make-up, which accounts for 17.7% to the total or about $100bn worth, according to the most recent report from the CBR.
The plan has already won preliminary approval from a special “strategic” planning meeting of top government and central bank officials, including Governor Elvira Nabiullina, on August 30, Bloomberg reports, citing people familiar with the talks.
Since sanctions were imposed on Russia, including the CBR sanctions and SWIFT sanctions that were imposed only days after Russia’s invasion of Ukraine in February, Russia has been unable to spend its dollars and has begun a process of yuanisation. Trading in the Chinese currency on the Moscow Exchange has soared and Russian banks have begun to offer yuan-denominated retail deposit accounts to the population.
The yuan made gains after the news broke, as did the Turkish lira and India’s rupee, which are also candidates for the $70bn FX shopping spree.
“In the new situation, accumulating liquid foreign exchange reserves for future crises is extremely difficult and not expedient,” a presentation on the proposal prepared for the meeting said, cited by Bloomberg.
“The frozen $300bn were of no help to Russia; on the contrary, they became a vulnerability and a symbol of missed opportunities,” the presentation said.
Saving that money “is a direct reduction of investments in Russia in favour of investments in other countries,” the document said.
Problems with the plan
However, the document and independent analysts pointed at several problems with the plan.
The document noted that selling yuan holdings “requires separate agreement with China, which will be very hard to get in a crisis.” It is not clear why the Kremlin would have to get the Chinese permission to sell yuan, as there is no known agreement restricting Russia’s ability to buy and sell yuan on currency markets.
If other EM “soft” currencies are bought in place of yuan then they suffer from both political and devaluation risks as well as markets liquid enough to swallow billions of dollars worth of trade. The Turkish lira in particular is very unstable after the Turkish central bank all but exhausted its own reserves defending the lira during the last year.
Another problem is that Russian banks hold a lot of these soft currencies too as they have rushed to dump their dollars, afraid that large dollar holdings will make them sanctions targets. At the same time, Russia’s trading partners also hold a lot of soft currencies and are not keen to be paid in their own currencies, as they would prefer to convert their holds into hard currencies like the dollar and the euro, which continue to dominate settlements in global trade deals.
The document says yuan holdings could reach $180bn, including unspecified additional purchases made this year.
After accumulating the new friendly currencies the plan also calls for as much as $180bn equivalent to be then spent over the next three to five years on the import of technology and equipment now unavailable to Russia.