THE BELL WEEKLY: More Than Just an Exchange Rate

The Bell

Hello! This week, in our main story we explain why Russians take the ruble exchange rate so personally that its devaluation is a serious political problem for the Kremlin. Then we turn to a failed launch of a Russian lunar station. Finaly, we look at how one of the most popular brokers in Russia became a victim of short seller activists who accuse the firm of dodging sanctions.

Why is the exchange rate so important to Russians and to the Kremlin

This summer, Russia is facing its latest currency crisis. On Aug. 11, the dollar broke through the benchmark 100-ruble mark, while the euro was trading at 110 rubles. Its tumbling value has become a hot topic in the Russian media in recent weeks. Ordinarily, foreign exchange rates shouldn’t be a big concern in a country that finds itself heavily sanctioned and cut off from many import channels. But in Russia’s case, it’s not so simple. For many years, Russians have regarded the ruble’s value as more than just an exchange rate.

Russians closely follow the rates for dollars and euros, a recent survey by Otkrytiye Bank showed. According to the poll, 80%  of those surveyed kept track of the forex  market, whether every day or a couple of times a month. These results contradict State Duma deputy Anatoly Aksakov, who sits on the Financial Markets Committee, who said week that “Most people don’t care about this [dollar to ruble] rate.”

Why is the exchange rate so important to Russians? In the U.S.S.R. in the 70s and 80s, owning foreign currency was the key to acquiring prized imported goods. Privileged Soviet citizens, who were entitled to have foreign currency, could use it on trips abroad, or spend it in the import-only Beryozka stores that sold sought-after jeans, imported alcoholic drinks and rare books. For most ordinary people, buying and selling foreign currency was a criminal offense.

After the break-up of the U.S.S.R., the Russian economy fell into a crisis: the ruble depreciated, the shelves were bare, and consumer inflation ran at several thousand percent each year. In the early 90s, major companies and banks were sold for less than $100,000. “It’s hard to imagine how highly foreign currency was valued in our country at that time,” wrote the business newspaper Kommersant.

Amid this period of hyperinflation, many Russian stores started displaying prices in so-called “conventional units” – i.e. dollars. The economy gradually stabilized — but the 1998 default brought “conventional units” back into circulation. At that time, many shops accepted payment in dollars, with change given in rubles, often at an arbitrary exchange rate. Officially, non-ruble pricing has been banned since 2004. But in moments when the ruble’s value quickly dropped, for example in 2014, some traders reverted to selling their wares in foreign currency. In 2022, as the ruble’s value plummeted due to the invasion of Ukraine, this practice was not widespread. But as before, there was a black market in foreign exchange against a backdrop of currency controls.

In the turbulent 90s, many in Russia had greater faith in the dollar than in the national currency. People who bought dollars did not lose their savings after the 1998 devaluation, when the ruble effectively went up in smoke. “As I recall, we had saved about $20,000 in rubles and when I saw [of Russian President Boris] Yeltsin’s drunken face on TV saying ‘There will be no devaluation, understand!’ I immediately told my father to change all the money into dollars and keep it at home. He didn’t agree. We only changed half. The rest of the money burned up [after devaluation]. Within two months, dollars were three times as expensive and all the prices went up,” recalled one individual who lived through the 90s.

More than half (62%) of the Russians surveyed by Otkrytiye are certain that the exchange rate with the dollar and the euro has a significant influence on their real-term incomes and consumption levels. Exchange rates affect domestic prices via imports and production costs. Over the long term, fluctuating exchange rates are almost all passed down to the consumer via prices. Over a five-year period, 98.5% of exchange rate variation is passed on this way.

In the current situation, prices for some goods in Russian will start rising as early as September. Although Russia is isolated internationally, imported goods continue to be freely available within the country. But their prices depend entirely on the exchange rate.  Electronics, coffee, sweets, sausages, sushi, berries and fruits will all get more expensive.

Why the world should care

Russians have long regarded the dollar and euro rates as indicators of financial security and stability. With each passing crisis, that belief has only intensified. In August, foreign currency assets made up 24% of savings held by Russians both at home and abroad. That’s the highest level since April 2022.

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Russia Loses its First-Ever Lunar Station

Russia attempted to launch a lunar station for the first time since the Soviet era. The Luna-25 mission was initially planned for the late 90s. But because of a combination of the failure of other space programs, a lack of funding, sanctions, and the collapse of international cooperation in space, it only made it to the launch pad this month. State space agency Roscosmos had high hopes for the $100 billion mission — but it ended in failure.

The Luna-25 crash became known on Aug. 20. Roscosmos said that it lost contact with the lander during its transition to a pre-landing orbit. It most likely crashed into the moon’s surface.

The mission’s aim was to land a research station on the moon, where it would spend a year searching for traces of water. It would also prepare a landing site for future stations. The initial task of landing somewhere around the moon’s south polar region was not easy. Specialists placed its chances of success at 50/50.

While the U.S.S.R. was an active player in the global space race, contemporary Russia has largely dropped out of it. “For me, [Luna-25] was probably the last hope of seeing the revival of our lunar program,” researcher Mikhail Marov, who worked on several Soviet interplanetary missions, said after the crash. After hearing of the mission’s failure, Marov was hospitalized.

Luna-25 cost at least 12.6 billion rubles ($134 billion). That’s half the sum that Russia is estimated to spend each day on its war in Ukraine.

Why the world should care

Russia has inherited huge legacy from the Soviet space program. However, it appears that not even this can help the country be a major player in the space race, especially at a time when the country’s spending is primarily going toward the war in Ukraine.

On Aug. 15, activist short sellers from Hindenburg Research accused Freedom Holdings, a broker popular with Russian investors, of falsifying reports and circumventing sanctions. Hindenburg’s sources said that Freedom’s clients brought suitcases stuffed with cash, and its employees broke the law to launder millions of dollars of dirty money. The broker denies these claims.

Freedom Finance is regarded as one of the biggest brokers with Russian clients — data from January 2022 suggests it had more than 137,000 clients. Since the start of the war, it has been harder for Russian investors to acquire foreign assets: foreign brokers started blocking Russians from opening accounts, while the Central Bank imposed a ban on investing in securities issued by “unfriendly” countries. Freedom, which subsequently moved to Kazakhstan, offered Russians a way to open accounts outside of the country, giving them an opportunity to invest in Western markets.

Freedom’s alleged sanctions violations were described to Hindenburg by former employees of the broker. One of them claimed that he personally saw a suitcase stuffed with $2.5 million in cash. Staff at Freedom allegedly failed to carry out any checks on the sources of these funds. “Basically, they were cowboys,” one source said. “They found a way to get money from oligarchs, send it all around the world and invest it in stock markets.”

In addition, Freedom was accused of advertising its ability to withdraw assets from sanctioned banks. This claim is easier to prove than accusations which rely on statements from sources because “there was a public marketing campaign,” Roman Rasimas, a lawyer for sanctions experts Zorge Partners, told The Bell.

Freedom’s founder, Timur Turlov, denied all the allegations. He also said that at least one of Hindenburg’s sources might hold a grudge after being fired on grounds of “insufficient knowledge” shortly after being hired.

Why the world should care

Experts interviewed by The Bell believe that the results of an investigation into these claims could result in a tightening of compliance rules for Russians and Russian companies, whose money is already widely regarded as toxic due to the war.


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