The ruble’s depreciation at the end of November from 100 to the U.S. dollar to lows of 115 was the market’s reaction to new U.S. sanctions announced on November 21 against Gazprombank and about fifty other banks servicing Russian foreign trade. There was an expectation that the supply of currency on the market would dwindle and that making payments would become an even more complex, lengthy, and expensive process (even before the latest sanctions, transaction costs could comprise 10 percent of the transaction amount or even more).
Until the latest sanctions, Gazprombank was the only major Russian bank not subject to restrictions, since foreign buyers of Russian gas paid for it in foreign currency via the bank. Gazprombank then converted that currency into rubles before transferring the payment to Gazprom’s accounts. The U.S. government sought to avoid disrupting gas supplies to Europe, and Gazprombank’s role in the gas trade was seen as a shield against the risk of being sanctioned. That status also allowed the bank to play a key role in the trade of many other non-sanctioned goods.
Although Gazprombank’s sanctioning prompted widespread anticipation that Russia would face more problems receiving revenue from the export of pipeline gas, the situation is not as critical as it may appear. Firstly, Gazprom can receive payments for gas (in rubles, at least) through banks that are included on the U.S. General License No. 81: a list of banks that are sanctioned, but through which energy-related transactions are still possible. Secondly, U.S. sanctions technically only prohibit transactions in dollars. Payments in other currencies, subject to certain precautions, do not come under U.S. jurisdiction. European buyers have long been paying for Russian gas in euros.
At the same time, U.S. sanctions legislation is deliberately vague: there is always a risk of getting caught up in secondary sanctions from the executive authorities or being fined by U.S. courts, which tend to interpret the law broadly. Accordingly, despite the technical possibility of continuing to pay for gas in euros through Gazprombank, payments may indeed be suspended.
If that happens, the damage to the Russian currency will be tangible, but hardly catastrophic. In the third quarter of 2024, Gazprom earned $9.5 billion from gas sales abroad (including $2.16 billion from pipeline gas supplies to China). In the same period, Russia made a total of $108 billion on commodity exports, and the current account surplus was $9.2 billion. In other words, even if gas export revenues dried up completely, that would still do no more than reduce the trade balance to zero.
Another factor cushioning the blow from the new U.S. sanctions is that since the invasion of Ukraine, Russian businesses involved in export and import operations have already adopted some quite unusual (and sometimes murky) financial and payment schemes.
Before the war, keeping currency inside Russia was convenient, profitable, and safe. Exporters would gladly bring currency into Russia and sell it to importers on the Moscow International Currency Exchange, which would deposit it in their Russian bank accounts and pay their international suppliers from Russia. But the many barriers erected on both sides now make this too problematic. It makes more sense to move goods abroad, sell them there, leave the currency in a foreign account, receive payment in rubles within Russia from a potential importer, and transfer an equivalent amount of currency from one foreign account to another (either to the importer or, at their instruction, to the supplier of that importer). The exporter and importer find each other either directly or via intermediary firms. The advantages of this scheme are that it saves both time and money.
To put it in very basic terms, an exporter might put suitcases containing currency that is safe for Russian companies to deal with (such as UAE dirhams) in a storage locker somewhere in Hong Kong, while trading the keys to the lockers for rubles in Moscow.
What is happening today is essentially “hawala” (Arabic for “transfer”): an informal financial settlement system often used by labor migrants from the countries of the Global South. They take their earnings to a broker in London, for example, then give the password to their relatives in their home country, who receive money from another broker from the same network.
Now Russian businesspeople are being forced to resort to this same ancient method of mutual settlements to save time and money searching for channels that are still prepared to work with entities from Russia, and to avoid losing money if accounts are frozen under sanctions legislation. Their counterparts from Iran, another country subject to heavy sanctions, do the same.
This practice is at odds with the policy of Russia’s monetary authorities, who seek transparency and oversight of money circulation. But given all the problems blighting import and export operations, they are prepared to turn a blind eye—hence October’s reduction in the rate of repatriation of foreign currency earnings.
These gray currency transactions are fraught with a number of real problems and potential risks. For example, tax authorities in both Russia and the second country involved in the transaction may view the receipt of funds into accounts as income: after all, they are only seeing one part of the process. Nevertheless, the pros outweigh the cons.
The exchange rates in use on this rapidly growing market outside Russia may differ significantly from those on the domestic market. Outside of Russia, the rate is largely determined by the balance of supply and demand for currency among Russian exporters and importers. Inside Russia, it is determined by the cost and capacity of the channels for transferring currency into Russia.
The turnover and exchange rates of the trading platforms that have sprung up under the hawala system are unlikely to ever become transparent. But there is one mechanism that links the two parallel exchanges.
Oil exporters are a major source of foreign currency on the “offshore” market outside of Russia. The mineral extraction tax, which can be as much as 60 percent of revenue, is calculated using the official exchange rate. Oil exporters simply cannot afford to sell significant amounts of currency much cheaper than the official rate, or they will not have enough money to pay the taxes. They can tolerate some difference between the two rates, but only as long as it is less than the transaction costs of transferring funds to Russia.
There is still a fairly broad and simple channel for moving foreign currency earnings for energy commodities into Russia, so transaction costs for this category of exporters are lower than average. And it is in their interests for the rate in the Russian hawala system to be higher or equal to that used for tax calculations.
It’s possible that in the future, the central bank will somehow gain access to the largest platforms outside of Russia and start using their data to calculate the official rate. But that is only a theoretical scenario for now. Players on the cross-border currency market are keen to ensure that their activities continue to go unnoticed, because any attention increases the likelihood that they will fall into the crosshairs of U.S. sanctions.
