Currency paradoxes of the "currency board” cancellation

After the beginning of the sanctions war of the collective West against Russia, much has changed in the currency economy of the latter. Moreover, some changes are understandable and have their own logic. Other changes are not clear; moreover, almost nothing is said about them. The word "changes" in relation to some new phenomena in the currency sphere is too soft. It is more correct to qualify them as "failures", "disorganisation" and "paralysis".  

For example, after the freezing of the foreign exchange reserves of the Bank of Russia in the amount of over $300 billion (exactly half of the assets of the Central Bank at the time of freezing), the Central Bank of the Russian Federation stopped operations for the purchase and sale of foreign currency. On sale – for the reason that there was nothing to sell. On purchase – because of fears of new freezings (and then, perhaps, also confiscations).

At the same time, it became unclear how the Central Bank has been issuing rubles for the last three and a half months. After all, the Central Bank almost from the moment of its formation acted as a currency exchanger: it bought foreign currency for rubles, which were thus thrown into monetary circulation. Since the end of February, the work of this currency exchanger has stopped.

They thought that it would be replaced by a ruble emissions issue in the form of loans to the Russian economy (through commercial banks). Alas, this transformation of the Central Bank, which was expected by everyone, did not happen. As of March 1, the Central Bank's balance sheet indicated that the amount of loans issued and the Central Bank's funds on deposits amounted to 11.81 trillion rubles.

By April 1, it had fallen to $5.16 trillion, by May 1 – to a record low of $3.48 trillion. In three months, a reduction of 3.4 times!  The fact is that the Bank of Russia has dealt a stronger blow to the Russian economy than many sanctions: it sharply raised the key rate to 20% and thus paralysed the credit process in Russia.

It turns out that the freezing of the foreign exchange reserves of the Bank of Russia, coupled with a provocative increase in the key rate by Neglinnaya, led not only to astronomical losses of money (by the way, frozen reserves consist in an amount equivalent to the annual budget of the Russian Federation), but also to a complete paralysis of the issuing activity of the Bank of Russia (and this is the main function of any Central Bank).

I will draw your attention to another so-called "paradox". The sanctions war against Russia provoked an increase in world energy prices, which, as is known, occupy the main place in our exports. With a slight reduction in the physical volumes of oil and natural gas exports, the export values went up sharply.

At the same time, due to the sanctions, there was a very significant reduction in Russian imports. A huge positive balance of trade in goods and services was formed.

According to the results of the first quarter, it amounted to $66.1 billion. Data on the results of the first five months (January-May 2022) have just been published: the positive balance has already increased to $124.3 billion. If this continues, the indicator will exceed $300 billion by the end of the year. There was no such record in the history of Russia.

Let's note that the vast majority of export revenue comes in the form of "toxic" currency – US dollars, euros, British pounds, Japanese yen, etc. (despite the vociferous statements about the transition in foreign trade to rubles, in reality, payment for exports continues mainly in "toxic" currencies).

The presidential decrees adopted at the beginning of the sanctions war provided for the mandatory transfer of foreign exchange earnings to Russia and the mandatory sale of 80% of foreign exchange earnings from exports for rubles. Previously, the currency received from exports and coming into the country was bought mainly by the Bank of Russia. It hasn't done that for three and a half months. Where are the huge volumes of toxic currency going to?

Experts have suggested and are suggesting that this is done by Russian commercial banks that operate on the currency exchange. But which banks? It is unlikely that this is done by leading Russian banks that have found themselves under full sanctions (VTB, “Otkritie”, Sberbank, Promsvyazbank, etc.). Most likely, some banks of the second row. But the Bank of Russia does not report anything about this, everything is based on guesswork.

It is suggested that these anonymous second-row banks do it without hunting. Why do they need a currency that is "toxic" (i.e. it can be frozen or even confiscated at any time)? Why do they need a currency whose exchange rate against the ruble continues to fall? It has been suggested that such banks are forced to work with such a "toxic" currency by order from Neglinnaya.

But all these were versions and assumptions. Now some statistics appear on the website of the Bank of Russia, which partly clarifies the picture, but not completely. In the table of the review of the banking sector of the Russian Federation, we see the following values of assets of Russian banks in foreign currency (trillion rubles): as of March 1 – 11.21; April 1 – 11.74; May 1 – 9.98. The share of foreign currency assets in the total assets of the banking sector decreased in three months from 12.1 to 10.6%.

Of course, if we express the value of foreign currency assets not in rubles, but in dollars, then the picture will be significantly different. After all, in three months there was a weakening of the dollar and a strengthening of the ruble (from 93.56 rubles per dollar on March 1 to 71.02 rubles on May 1). At the beginning of the period, foreign currency assets amounted to $119.8 billion, at the end of the period – $140.5 billion. The increase amounted to $20.7 billion.

But for these three months, Russia's trade surplus was close to $80 billion. It turns out that the increase in foreign currency assets of Russian banks amounted to only one quarter in relation to the value of net foreign exchange earnings from foreign trade. Where are the other three quarters?

To be sure, we can also look at the foreign exchange liabilities of the Russian banking sector. At the beginning of the period (March 1), the foreign currency liabilities of Russian banks to citizens and legal entities amounted to 18.68 trillion rubles, and at the end of the period (May 1) they decreased to 15.21 trillion rubles.

In dollar terms, foreign currency liabilities at the beginning of the period amounted to $199.7 billion, and at the end of the period – $214.2 billion. The increase in dollar terms amounted to $14.5 billion. But, after all, this is five and a half times less than the net inflow of foreign currency to Russia in three months.  

Involuntarily, I remember the words from the song "Dialogue on the TV" by Vladimir Vysotsky: "Where is the money, Zin?". The most plausible version of the answer: it is there, "over the hill".  Despite the requirements of presidential decrees that foreign exchange earnings from exports should not get stuck in banks in different Englands, Americas and offshore jurisdictions, it still settled there. There isn’t much logic in such escapism. They'll find it anyway, freeze it and confiscate it. Simply put, they will rob it. Those who organised the sanctions war.

But there's nothing one can do about it. Over the years, our kleptomaniac exporters have developed a reflex: to take out the goods, get the currency for it and hide it on some uninhabited offshore island.

Since the end of February-beginning of March, when President Putin signed anti-sanctions decrees, they continued their thieving and concealment activities, but at the same time lost their composure: what if someone in Russia grabs them by the hand and accuses them of violating presidential decrees?

Lobbyists were involved in order to get everything back on track. On May 23, 2022, it was decided to reduce the level of mandatory sale of export earnings to 50%.

On June 7, the Ministry of Finance reported that the subcommittee of the government commission for the control of foreign investment in Russia, acting under the department, decided to allow exporters to transfer currency received from non-residents under foreign trade agreements to their accounts abroad from June 6.

The Bank of Russia was generous in general: it allowed individuals to transfer up to $150,000 or the equivalent in another currency abroad per month from June 8 (let me remind you that the limit was determined by presidential decree at $10,000).  

Apparently, there is a very intense and almost invisible struggle on the issues of the sanctions war in the power structures of Russia. Thank God, at the top there are supporters of preserving and even tightening those monetary and financial restrictions and prohibitions that are prescribed in the anti-sanctions decrees of the president. Here is the latest positive news on this topic. 

At the end of May, a group of deputies amended the law "On Measures to influence (counteract) unfriendly actions of the United States and other foreign States" (dated June 4, 2018, No. 127-FZ). On June 8, these amendments, issued in the form of a separate law, passed the third hearing and were adopted. After being signed by the President, the law will come into force. 

The main "grain" of the new law is contained in Article 4 "Specifics of the introduction and application of measures of influence (counteraction) aimed at ensuring the financial stability of the Russian Federation." To briefly summarise the essence of the adopted law, it boils down to the fact that the President of Russia receives the authority to make operational decisions on monetary and financial issues of the economic war.

Of course, this is a very positive step. It reduces the ability of the departments of monetary authorities (the Central Bank and the Ministry of Finance) to weaken and neutralise the strategic decisions of the president in the field of economic war against the collective West.

If the president will really be ready for the operational command of the economic war, then he should return to the statement he made on March 23 this year at a meeting of the Government of the Russian Federation. He then stressed that it makes no sense to supply Russian goods to other countries and receive payment in dollars and euros. And he proposed to begin the transition to the use of the Russian ruble in foreign trade settlements with contracts for the supply of natural gas to Europe. Unfortunately, this correct decision was emasculated (as I have repeatedly written about).

And in order for the presidential anti-sanctions decrees and orders not to be emasculated, control over their execution is needed. Alas, there was no such control. And it is not so difficult to detect violations. Even using such an open source of information as the statistics of the Bank of Russia. The oddities and inconsistencies that I identify during the analysis of such statistics I usually call "paradoxes". Often, these "paradoxes" hide deception and crimes.