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. Last Updated: 07/27/2016

Wringing Dollars from Exporters at MICEX




The Central Bank is talking of dropping the controversial dual system of foreign exchange trading, which it introduced Oct. 6. Sujata Rao reports from the now-sleepy halls of MICEX.


Russia's currency markets and exporters are hoping that Central Bank Chairman Viktor Gerashchenko follows through on a promise last week to scrap the special dollar trading system that was introduced less than a month ago.


But the Central Bank will need to find something to replace a system that, though confusing and coercive, has allowed it to reassert some control over Russia's collapsing currency.


At a conference in London last week, Gerashchenko told investors the new dual trading system was "an incorrect phenomenon set up as an experiment," and would soon be amended.


That was good news for currency dealers like Konstantin Svyatny of Bank Rossiisky Kredit, who doesn't think much of the dual trading system.


"The Central Bank has been the main beneficiary," Svyatny said. "It has effectively gagged the market."


The key to the system introduced Oct. 6 is that exporters were forced to start selling at least 50 percent of their hard-currency earnings during a special hour-long morning trading session. Only the Central Bank and companies with import contracts are allowed to buy dollars during these sessions.


Even before Oct. 6, exporters had been required to repatriate 50 percent of earnings, but the Central Bank had not tried to check on how they did it and exporters were allowed to shop around for the most favorable exchange rate.This is no longer the case. Commercial banks, who have a voracious appetite for dollars, are excluded from the special morning sessions. With a guaranteed supply of dollars from exporters but only a limited group of importers buying dollars, the ruble is usually much higher.


The afternoon session is more open and produces a generally lower ruble rate. Commercial banks may buy and sell dollars for their own needs. But exporters, who have the lion's share of the country's dollars, are not allowed to participate. With lots of buyers competing for fewer dollars, the dollar is more expensive.


All these trades are executed through an electronic system known as SELT (System of Electronic Lots Trading) and then registered on the Moscow Interbank Currency Exchange.


The exchange rate picture is further complicated because the Central Bank sets its largely symbolic official ruble-dollar exchange rate based on a weighted average of rates prevailing in this ruble-friendly hour each morning.


The dual system marks a step backward for Russia to 1992 when the government had four separate exchange rates for different categories of currency traders.


But the system helps the Central Bank, which lost control over the exchange rate on Aug. 17 and is badly trying to rebuild its depleted reserves.


"The idea was explicit," said Lawrence Austen, head of currency trading at MFK Renaissance. "To get exporters to repatriate their profits, a stronger exchange rate for the ruble and an effective way of recapitalizing the Central Bank."


The key is that the Central Bank has privileged access to the morning session where dollars are cheap. The bank gets dollars to augment its hard-currency reserves.


It largely controls the exchange rate and may manipulate it as it chooses; by buying less dollars in the morning's hour of trade, it can boost the ruble f as it did recently when Russian banks' dollar forward contracts came due.


The Central Bank has also engaged in arbitrage between the two trading sessions f purchasing cheaper dollars in the morning and selling them as expensive dollars in the afternoon f to boost its hard-currency reserves. It has been a profitable exercise: Three days after the dual system had been instituted, the Central Bank announced that its reserves had grown by $500 million over the previous week.


Different exchange rates during the two sessions could be a source of annoyance to exporters and banks, analysts said.


The difference, which stood at 11 kopecks on the first day of dual trading, shot to 15 the next day and then to 20. The difference was clearest on Oct. 15, when the Central Bank was manipulating the exchange rate as forwards came due f the ruble strengthened to 13.55 to the dollar in the morning while in the freer afternoon trading the rate was at 15.81, a difference of nearly 15 percent.


But some argue that the Central Bank has played its cards fairly judiciously. It has been smart enough not to let the difference between the exchange rates in the two sessions widen too significantly. Of late it has even propped up afternoon rates by selling more dollars.


"It is good they are not being too greedy," Svyatny said. "If the difference in rates is too large, exporters will find ways to keep out of the system, and banks will find ways to participate in the morning."


If the system is working so well for the Central Bank, why would it now talk of scrapping it? Analysts said the bank was probably responding to pressure from the powerful exporters lobby, which has already flexed its muscles to fend off tax increases on oil and gas.


Most exporters would rather stash their money abroad or sell it directly to Russian commercial banks at a better exchange rate rather than hand it over on the cheap to the Central Bank; in fact, many exporters are obviously holding back billions of dollars in revenues. Trading volumes average about $100 million daily, as compared to the $1 billion or so in pre-crisis days.


"It has been argued that [the low] volumes ? clearly indicate that exporters were already not adhering to the rules," Austen said, adding that he has long expected an announcement canceling the dual trading system, and added, "It is indicative that exporters have won out over the Central Bank."


Scrapping the system will not radically alter things, however. Most traders and analysts said the dollar would not plummet because dollar demand is still weak. Imports have declined 60 percent since August and banks have limited free ruble assets to speculate in dollars.


And soon there will be even tighter controls on banks. Starting Nov. 1, the government has announced, banks that have bought foreign currency for import contracts can hold the money in their accounts for no more than seven days. If the currency is not used within that period it must be sold immediately on MICEX.


Measures such as these may stem demand for dollars but the bigger problem is increasing supply. One of the main aims of the system was to stem capital flight by forcing exporters to repatriate part of their earnings.


Even if the morning and afternoon trading sessions are scrapped, the Central Bank will still probably insist that exporters at least make a show of selling cash they earn within two weeks of receiving payment. There are also moves afoot to force exporters to repatriate 75 percent of earnings or to tighten the deadlines for repatriating their dollars.


Analysts said that the Central Bank will need to compensate the loss of the dual exchange rate with some other mechanism. "[Without the dual exchange rate system] the Central Bank will lose the possibility to earn through arbitrage," said Alexander Gubarev, an economist with investment bank CAIB. "But by forbidding banks to take open-dollar positions, they can still prop up the ruble, and of course they will find a way to force exporters to repatriate some earnings."


Still, unifying the dual system would be a welcome move to MICEX's currency traders. "Trade will be more natural, it is not fair that right now some participants can buy currency at special rates," Austen said. "It is also affecting liquidity."


And if currency markets are unlikely to go back to the trading system of yesteryear as long as the ruble remains volatile, at least there will be some life back at MICEX. For instance, Svyatny's main complaint about the present system is boredom. "A market without speculators is no market at all," he said. "It's just something artificial."