Restrictions on foreign banks buying forex for rubles would hurt foreign trade - CBR
MOSCOW. Oct 10 (Interfax) - The Central Bank of Russia (CBR), continuing its debate with proponents of using elements of the so-called Chinese model for regulating the currency market amid its increasing division into segments, devoted a whole sidebar in its latest report on financial market risks to the structure of transactions on the exchange and over-the-counter forex markets, laying out in detail its position against introducing a "membrane" along Chinese lines.
The architecture of the forex market has significantly changed since February 2022, the CBR said in the report, which was published on Monday. On the OTC market, the share of trading in "toxic" currencies is decreasing, but remains dominant, unlike on the exchange market. In September, the U.S. dollar and euro accounted for about 69.2% of turnover on the OTC market and the yuan made up 25.9%.
"Thus, the exchange segment of the forex market is becoming the market for trading the currencies of friendly countries (foremost the yuan), while the OTC segment continues to focus on trading 'toxic' currencies," the CBR said.
The OTC market plays an important role for the ruble's exchange rate, since a significant amount of supply and demand for forex is generated by Russian banks' client transactions with "toxic" currencies, as well as interbank cross-border transactions, the CBR said.
Net forex supply is provided by foreign nonfinancial companies, including foreign traders, within the context of payments for Russian exports in rubles. Their transactions grew to 89% of net forex sales by the main groups of participants in August from 24% in January.
"The net sales of Russian nonfinancial companies are also an important factor of foreign currency supply on the market. However, in April, July and August 2023 nonfinancial companies became net buyers of foreign currency, which was one of the factors of the accelerated weakening of the ruble in these months. Nonfinancial companies' transition from net sales to net purchases was due to an increase in their demand for forex in these periods," the report said.
"In addition to Russian nonfinancial companies, net demand for forex is generated by foreign banks from friendly countries. Demand for forex for rubles on the offshore market through the cross-border transactions of Russian banks is completely transmitted to the ruble's exchange rate. This makes it possible to maintain unified exchange rate formation on the domestic and foreign markets and ensure the free convertibility of the ruble," the CBR said.
"Imposing restrictions on purchases of forex for rubles for foreign banks would lead to the artificial constraint of foreign trade activities, which would provoke the growth of domestic prices and slowdown of structural transformation and the rate of economic growth," the CBR said.