Russia Export Windfall Finds Sanctions Haven in Yuan, Quasi-Bank

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(Bloomberg) — A little-known unit of Russia’s main stock exchange has become a vital link to the global financial system as tens of billions of dollars and euros flood in from sales of oil and other commodities.

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The National Clearing Centre has seen its foreign-exchange holdings have surge this year, according to people familiar with its operations. A key link in the gas trade, it has so far avoided the US and European sanctions that have hit the central bank and Russia’s major lenders. 

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Much of the money at NCC, which is held on behalf of Russian banks and their clients, is in yuan, shifted out of dollars and euros and other “unfriendly” currencies at the behest of the central bank, the people said, speaking on condition of anonymity to discuss matters that aren’t public. Smaller unsanctioned lending institutions also have seen holdings in yuan and other foreign currencies jump, the people said.

Russia’s ability to blunt the blow of sanctions thanks to the continuing inflow of cash from energy and other exports has frustrated officials in the US and Europe seeking to isolate it from their financial systems after the Kremlin invaded Ukraine on Feb. 24. Sanctions imposed shortly after that on the Bank of Russia cut off the usual place where those funds accumulated. But with energy prices surging, the inflow continued unabated. Against that backdrop, the NCC’s holdings have exploded.

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“The NCC doesn’t have money of its own. This is all the banks’ money, more precisely their clients’ money, that they put in the NCC because it can conduct payments in dollars” since it has correspondent accounts with US banks, said Oleg Vyugin, who was chairman of the board at the Moscow Exchange until June 2022 and before that a top official at the central bank and Finance Ministry. Many Russian lenders lost their own such accounts as a result of sanctions. 

“After there were rumors that the NCC would be sanctioned, the bulk of the dollars were converted to yuan,” he said. The Chinese currency is down about 12% against its US counterpart this year.

Just how much money the NCC, whose full name is Central Counterparty National Clearing Centre JSC, now holds isn’t clear. Since the sanctions froze about $300 billion in the Bank of Russia’s reserves after the war broke out, authorities have stopped disclosing all but the most general information about Russia’s holdings. 

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The central bank declined to comment for this article. The NCC doesn’t have a press office and the Moscow Exchange didn’t respond to a request for comment.

The NCC so far hasn’t been hit with sanctions, though the US added its chief executive to its blacklist in September. The Kremlin’s decision in the spring to require Russia’s gas buyers in Europe to route payments through the NCC meant that imposing limits on dealing with it there would have jeopardized vital energy supplies. 

In effect, a surplus of foreign exchange, once absorbed by the Bank of Russia, is ending up in quasi-private hands because sanctions deprived the central bank of the ability to operate in the currency market. Normally, as the Moscow Exchange’s clearing house, the NCC acts as an intermediary between participants across markets ranging from foreign exchange to derivatives.

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Bloomberg Economics estimates the total windfall could have exceeded $100 billion, based on balance-of-payments data from the central bank that shows the increase in international assets.

What Bloomberg Economics Says…

“The Bank of Russia lost access to half of its international reserves this year, but that hasn’t prevented the country from continuing to stockpile international assets. Since the central bank halted open-market operations, the private sector has stepped in.”

—Alexander Isakov, Russia economist. 

Net accumulation of foreign assets reached almost $47 billion in the third quarter, official data show, adding to a $25.7 billion total in the previous three months. In its latest balance-of-payments report this month, the central bank attributed some of the increase to trade financing and advance payments extended to foreign partners.

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A similar note published by the Bank of Russia for the second quarter attributed higher volumes of financial assets in part to domestic lenders and non-bank credit organizations – a category that includes the NCC – amassing funds at foreign accounts by using export revenue at a time of high energy prices.

Vast sums are sloshing around the financial system in Russia as a result of a record surplus in the current account that the central bank forecasts at $243 billion this year, or nearly double the total from 2021.

“This was a very fat period,” said Vyugin of the second and third quarters of this year. “Energy prices were high and there were lots of exports.”

In the past, the Bank of Russia was able to mop up around 70% of the surplus and channel it into reserves, according to Bloomberg Economics. The central bank had to abandon that role since much of its holdings were frozen.