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An unprecedented raft of Western sanctions caused the ruble’s exchange rate against the dollar – which had hovered between 70 and 80 rubles in the year before Russia’s invasion of Ukraine – to collapse to 150 rubles in early March.

But the currency has since rallied to 104 rubles to the dollar. Why has the currency bounced back when the financial noose is meant to be tightening on the Russian economy?

Russia’s central bank (CBR) has enormous foreign exchange reserves of $640bn that have traditionally been used to manage the ruble exchange rate. Selling off these reserves helps maintain the ruble’s value and allows Russian importers to buy foreign currency at a reasonable price.

Western sanctions have frozen a big chunk of these assets, leaving Russia with $127bn of gold reserves and $70bn of yuan, and it’s yet to be seen if China will continue to allow Russia to access its yuan reserves. As Sergey Aleksashenko, former deputy minister of finance of Russia, notes: “Both are useless from the point of view of maintaining stability in the domestic foreign exchange market.”

It means Russia cannot prop up the ruble as before. To soften the blow, Vladimir Putin passed a law forcing Russian exporters to sell 80 per cent of their foreign exchange earnings for rubles within three days.

The question is: who is buying this foreign currency? The foreign exchange market is too “thin” – there isn’t enough trading going on to match buyers of rubles with sellers.

The answer, according to Johannes Borgen, the pseudonym of an expert in financial institutions and a managing partner at a French asset management firm, is that the CBR itself is buying it. “The exporters sell to the CBR and the CBR injects it in the system – via a non-sanctioned bank – when required by an importer,” he says.

Because the CBR acts as a sort of broker, buying foreign reserves from exporters and selling them, via intermediaries, to importers, the foreign exchange market is by-passed. Importers don’t need to sell their rubles on the market which avoids any downward pressure on the currency.

This backdoor works as long as Russia has a surplus on the balance of payments (the difference between the value of its imports and exports), which it does. The world is still buying Russian energy and commodities. It means Russia still has enough hard currency to pay for its imports – it doesn’t have to dip into its frozen reserves.

The issue with this get-around is that the CBR is still having to pay in dollars when it buys rubles from importers. The sanctions imposed on Russia are meant, in theory, to prevent this.  

“The way the sanctions system is designed allows – in practice, if not in legal terms – the CBR to outsource its foreign exchange management to the private sector,” says Borgen, who believes that by making payments through a series of intermediary banks, the CBR is able to hide the fact that it’s using dollars.

“Every US dollar is ultimately settled in the US,” he says. It means the CBR could, for example, open a dollar account with Gazprombank (which avoided western sanctions to allow payments for Russian oil and gas to continue) which in turn has a dollar account at a Chinese bank which in turn has a dollar account with a US depository bank.

Gazprombank is allowed to deal with the CBR. The Chinese bank only knows the net value of Gazprombank’s dollar account, not its source. And the US depository bank, in turn, only knows the net value of dollars in the Chinese bank, not its source. “This network is hiding CBR transactions,” says Borgen.

It doesn’t mean the banks in the middle aren’t running a risk. The US Bank Secrecy Act says institutions must have “appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through those accounts.”

Even so, it’s a grey area, and one Russia could be exploiting.

“Finding a way to close this loophole would be a massive blow to Russia’s economy”, says Borgen, “because so far, sanctions are only partially working.”