The Bank of Russia is developing counter-measures against the US sanctions to ensure resilience of the Russian financial sector. Obviously, the Russian regulator has exaggerated authority and independence, implementing directions from the government. Thus, it is the patriotic stance of the Kremlin that arouses concern of the population.
Moscow has been pushing ahead with the idea of scrapping the US dollar in international trade. A few years ago, the Kremlin suggested that invoices and transactions with the Russian trade partners should be settled in national currencies. Citing well-informed sources, the Bank of Russia slashed the share of US dollars and euros in its international reserves by 1.6% and 3.5% respectively in the year to March 2018. Therefore, the amount of US dollars in Russia’s state reserves decreased to 43.7% and the amount of the euros dropped to 25.7%. According to the energy conservation principle, a part of the foreign reserves has to be converted into other currencies. The choice was made in favor of the Chinese yuan. So, the central bank sold out dollars and euros and bought the renminbi. Unfortunately, this patriotic sentiment brought the domestic economy nothing but losses. When politics sets the tone for the economy, losses are inevitable. The lingering standoff with the West inflicts steady losses on the Russian economy. In 2017, the Russian monetary authorities carried out failed conversion of euros into dollars that entailed losses of $4.5 billion. Recently, the Bank of Russia decided to make massive investment into the yuan and again suffered losses of several billion dollars as a result of a difference in exchange rates.
By early April, the share of the Chinese currency in the state foreign reserves reached a historical record of 5% or $23 billion. The Russian regulator set about buying the renminbi in the middle of the last year. It allocated $3.9% billion for buying the yuan in Q2 and Q3 2017. The central bank provided $8 billion to buy the Chinese currency. The state reserves were replenished at the most in January – March 2018 when the bank converted $11 billion into the yuan. Interestingly, this move came when the yuan hit a record high of 6.2-6.3 versus US dollar.
Betting on China, the Bank of Russia played the wrong card. The market reversed its direction. The trade war between the US and China triggered capital flight from the Chinese economy. In this context, the yuan went into a downward spiral. As a result, the yuan’s depreciation erased the Russian investment by 9.4% in the period from April until September, thus the Russian economy sustained the total loss of $2.162 billion.
