Foreign exchange market in Russia

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Foreign exchange market in Russia

Financial market consists of 5 segments: investment, loan, stock, insurance, foreign exchange markets. In my report I would like to describe foreign exchange market in Russia. The foreign exchange market (FOREX market) is a global decentralized market for the trading of currencies. FOREX market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. Foreign exchange is an over-the-counter market where brokers negotiate directly with one another, so there is no central exchange.

The average daily turnover in the global foreign exchange and related markets is continuously growing. According to experts of the Swiss bank UBS AG daily turnover over-the-counter interbank currency exchange in 2010 was about $ 4 trillion dollars. By 2020, the daily turnover is projected to increase to $ 10 trillion dollars. This growth is achieved by the constant increasing of new members, the growth of speculative component (independent of the world's foreign trade) and the use of new technologies. The biggest geographic trading center is the United Kingdom, primarily London. However the biggest trader by overall volume is Deutsche Bank. It`s market share more than 15%.

Top 10 currency traders % of overall volume, May 2013

All ten currency traders are situated in 4 countries: Germany, the USA, the UK and Switzerland. The explanation can be this one: banks in the USA, German and in the UK hold currencies with the highest turnover (US dollar, Euro and pound sterling). German is European financial center, especially according euro. As for Swiss banks, they have the reputation of the most reliable in the world. Also Swiss franc has a very low inflation rate and stays rather neutral to the US dollar and Euro exchange rate. Swiss Franc is considered as world reserve currency.

The developed foreign exchange market is an important condition for the internationalization of the national currency. All participants must spend conversion operations quickly and with minimal costs. From this perspective, the ruble looks quite favorable. Russia has foreign exchange market with institutional structure and modern technology trade. Currency trading is mainly conducted in a decentralized market, but there is also a well-established stock exchange MICEX -RTS (Moscow Interbank Currency Exchange - Russian Trade System). There is foreign exchange market turnover by currency in table.

national currency euro ruble

Fig. 1 - USD - US dollar; EUR - euro; JPY-yen; GBP - pound sterling; AUD - Australian dollar; CHF - Swiss franc; CAD - Canadian dollar; MXN - Mexican peso; CNY - Chinese Yuan; NZD - New Zealand dollar; SEK - Swedish krona; RUB - Russian ruble; HKD - Hong Kong dollar

Russian ruble has a very small share in global currency turnover. The main problems are inflation and economic potential of the country. Russia has the highest inflation among 20 world economies that`s why it is not profitable to buy and keep ruble. Currencies with high turnover are freely convertible currencies while Russian ruble is partly convertible. However, the share increased from 0,9% to 1,6% (2010-2013). One of the reasons could be including ruble in the majority of international electronic trading systems (which involve large global banks).

In 2010 the share of the Russian exchange market on a worldwide turnover was 0.8% (14th in the world), down from 1.3% in 2007. The reason for this should be sought in the lack of development of internal market, its weak integration in the global foreign exchange trading, as well as to reduce turnover during the last financial crisis.

The main currencies in Russian exchange market are Russian ruble, euro and USD dollar. The ratio of the freely convertible currencies against the ruble plays a big role in Russian economy. For example the ratio of the dollar against ruble influences on earnings from exporting oil and prices of importing goods.

Fig. 2 - The ratio of US Dollar and EURO against ruble in 2009-2012 (in rubles)

As we can see from table ratios are quite stable. Some experts said that after entering to the World Trade Organization Russian ruble would be week. However the ratios did not change too much after 1 year in WTO. World`s economy is recovering after global crisis. In short term these ratios won`t change a lot because the oil price is rather stable and economic situation in Europe improved.

Russian banks make ruble exchange transactions not only with local, but also with international counterparties. From the point of view of geographically the main counterparties of Russian banks were banks of Western Europe (in fact, it is London) in 2012. 76-78% of USD/RUB transactions were there. Also many counterparties were located in northern Europe (9%). The share of other regions is small, such as the share of North America - only 1%.

In the near future for ruble is important status as a regional currency that gives the relative stability of financial relations and trade within a group of closely related countries (e.g. Belorussia, Kazakhstan and Tajikistan). In 2011 the statistics showed that the share of Russian ruble in trade among Eurasian Economic Community (EurAsEC) increased up to 52% of all currencies compared with 2010 (the share was 32%). It is a great progress because the share of Russian ruble is higher than US dollar (35%), euro (9%), Belarusian ruble (2%) and Kazakhstan Tenge (1%).

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