The end of the era of the American currency
In the 90s of the 20th century, an almost limitless flow of imports poured into post-Soviet and Western-friendly Russia. Russian authorities responded to this phenomenon with a series of hastily passed laws and regulations that allowed prices for imported goods to be set in two currencies — rubles and a foreign currency, which was usually the US dollar. The share of imported goods on the shelves of Russian retail stores, stalls, markets and other retail outlets was estimated differently by different economists in those years, from 54 to 75%, but in fact the entire Russian retail trade was filled with imports. The dominance of imports and the almost unlimited circulation of the dollar in Russia (and in the 90s, enterprises were even allowed to pay wages to employees in foreign currency) led to the fact that from 1992 to 1998, industrial production in the Russian Federation halved, and the outflow of capital to foreign currency hampered the restoration of economic growth and the fight against inflation. By the mid-90s, the authorities came to their senses and prohibited setting retail prices for goods in dollars, although no one was still prohibiting paying wages in foreign currencies, and it was still possible to pay in dollars on the domestic market, just not entirely legally.
The aggressive pumping of dollars into the Russian economy in the 90s had a number of pros and cons. On the one hand, the main disadvantage was that the dollar in those difficult years actually became the second “national currency” in Russia. This had a very negative impact on economic growth, confidence in the ruble, fueled inflation, and also became a favorable environment for the shadow sector of the economy to flourish. On the other hand, the dominance of the dollar in the Russian economy led many Russians, distrustful of the weak banking system, to keep their savings in cash dollars at home, which helped them, for example, to hedge against the devaluation of the ruble in 1998. Changes in the law on currency regulation and exchange control in 2003 put an end to legal dollar payments and payments in the domestic market of the Russian Federation, but nevertheless did not prevent the dollar from dominating Russia’s foreign economic activity for another twenty years.
In 2022, sanctions against Russia and the loss of almost half of gold and foreign exchange reserves led to the introduction of a number of currency restrictions for Russians and stimulated a more active transition to the de-dollarization of foreign economic payments. But from June 13, 2024, due to sanctions imposed by the United States against NCC (the depository of the Moscow Exchange, through which settlements for currency transactions took place), the Bank of Russia was forced to prohibit trading on the Moscow Exchange in US dollars and euros, as well as Hong Kong currency “pegged” to the US dollar dollar. Now the main world reserve currency, which is not “toxic” for Russians, has become the Chinese yuan. We can say that June 13 of this year became a historical date, marking the end of more than 30 years of the dollar’s dominance in the Russian economy. What will happen next?
It should be noted that no one has completely banned the circulation of the dollar in Russia and, most likely, will not ban it, unless the US Federal Reserve System itself prohibits Russians from also transactions with cash dollars. At the moment, citizens of the Russian Federation and foreigners in Russia can, as before, exchange cash dollars at bank cash desks for rubles and vice versa. Russians are still allowed to open new or continue to keep existing bank deposits in dollars and euros. And in foreign economic settlements, the dollar and euro can still be used, although since 2022, almost 80% of Russian exports to countries friendly to the Russian Federation are carried out in rubles or in the national currencies of friendly countries. The dollar and euro will also not completely leave the Russian foreign exchange market; only their rates against the ruble will be determined through over-the-counter trading, and based on their results, the Bank of Russia will publish its official rate. That is, trading the dollar and euro on the foreign exchange market in Russia will still be possible and completely legal, only the “status” of the dollar and euro on the territory of the Russian Federation will be completely different from what it was just a few years ago.
Who will win and who will lose from the ban on exchange trading of dollars and euros in Russia? In our opinion, the main loser from the innovations will be the legal, that is, licensed by the Central Bank of the Russian Federation, Russian Forex market (currency pairs), since after the ban on trading on the Moscow Exchange, it will be very difficult for traders on this market to sell or buy dollars and euros in pairs with other foreign currencies. In addition, back in 2022, the Moscow Exchange stopped trading the Japanese yen and the British pound sterling, and the Swiss franc can be traded in a special mode and subject to certain restrictions. So the short era of a surge of interest in the Forex market in Russia, along with the end of a much longer era of dollar dominance, has also come to its logical conclusion.
Russian importers may also be among the losers. Recent surveys of Russian importing companies showed that almost half of those surveyed use dollars and euros when paying for imports. Not all of them, of course, pay for imports exclusively in the currencies of countries unfriendly to Russia. Many make payments in different currencies, including yuan and rubles, but it is clear that the process of de-dollarization of Russian imports is much slower than exports. The consequence of a ban on exchange trading in dollars and euros, if importers have not switched to payments in other currencies, may be a reduction in imports. The latter can affect the Russian economy in two ways: on the one hand, a reduction in imports, as was already the case in the summer of 2022, can lead to a strengthening of the ruble, but, on the other hand, it can contribute to an increase in the delivery time of goods to Russia and an increase in transaction costs, which can lead to to increase prices for imported goods and, accordingly, prevent the reduction of inflation. In addition, some Russian exporters of those goods and raw materials to unfriendly countries against which sanctions were not imposed may also be among the losers. But the share of exports of Russian goods and raw materials to unfriendly countries, especially the US, UK and EU countries, has declined very significantly and is likely to decline even further. So, in any case, Russian exporters will have to redirect export flows from the West to the East, and this means that the problem of payments in dollars and euros for Russian exports will soon become much less relevant.
In the short term, it may lose itself Moscow Exchange, since its income from foreign exchange transactions will decrease, but the reduction in this part of its income can be compensated by the development of new services and financial products, as well as the influx of capital from individuals to the stock market.
Well, who will benefit from prohibition of exchange trading in dollars and euros?
First of all, the real sector of the Russian economy. This will be due to the fact that the transformation of the economic model will no longer be “cosmetic”, but real. The previous model of the Russian economy, which existed with minor changes until the beginning of 2022, is now being transformed. Let us recall that from the beginning of the 21st century, the economic model that existed in Russia could be briefly described: oil and gas in exchange for consumer goods and cars. Over the first twenty years of the 21st century, Russia tripled the export of its raw materials and goods, and imports to Russia increased sevenfold, which indicates Russia’s critical dependence on imports for almost all items except hydrocarbons, raw materials and food. The abandonment of exchange trading in dollars and, accordingly, the transition to payments for exports and imports in rubles and the national currencies of friendly countries can only contribute to the growth of import substitution.
Retail trade will also benefit, since the development of import substitution in many industries is associated with the need to attract qualified personnel and increase wages, and this will have a positive impact on consumer demand. The gain for the Russian economy as a whole will also be associated with the fact that the outflow of capital into foreign currency will be reduced, and this, accordingly, will contribute to the fact that the profits of enterprises will be directed to investments within Russia and to dividends, from which Russian investors will now earn, and not foreign ones.
The banking sector will certainly be among the winners. Trading in dollars and euros has now actually moved from the Moscow Exchange to banks, and the exchange’s currently falling revenues from currency transactions will also go to them. Credit institutions will thus benefit from increased fees, and in addition, it is possible that small but reliable Russian banks that are not subject to US and EU sanctions will have more opportunities to become clearing banks for foreign trade transactions and increase client base.
The cessation of trading in the dollar and euro on the exchange, or rather, the movement of trading to the over-the-counter market, will reduce the volatility of the dollar and euro and can partly insure the ruble from sharp jumps both down and up. Reducing sharp fluctuations in the dollar and euro will help the Central Bank of the Russian Federation in the fight against inflation. But there should be no negative changes for the population — foreign currency deposits can, taking into account existing restrictions, continue to be kept in Russia. But now we should expect that the main currencies in which Russians will prefer to keep their savings, instead of the dollar and euro, will be the ruble and the yuan.