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Corporates set to benefit as Russian FX market opens up

Corporates looking to transact USDRUB could be the first group to benefit from new signs that the country’s domestic currency market is becoming more open.

Brokerage Otkritie Capital – through the acquisition in 2007 of a UK-based firm licensed and regulated by the country’s Financial Services Authority – has developed a model whereby foreign investors can trade USDRUB in a market historically restricted to only domestic banks.

The Otkritie Capital model for helping foreign investors access the RUB market involves the UK-based arm of Russia’s Bank Otkritie acting as a broker for the Russian bank, transacting client trades through the Russian firm on to the Moscow Interbank Currency Exchange (Micex).

Micex has average daily volumes of $16 billion in USDRUB, which it estimates represents 30% of the market.

In December 2010, Otkritie Capital was the first broker to transact an FX trade on Micex on behalf of an international client.

Otkritie Capital head of direct market access (DMA) business development Alexander Ospischev tells EuromoneyFXNews that, since then, high-frequency traders and corporates frequently take advantage of the broker’s model in an effort to gain DMA to Micex.

 The share of USDRUB brokered deals on Micex is increasing

 Source: Micex-RTS Group

“The future is really bright for foreign investors looking to transact RUB,” says Ospischev. “Corporate clients using brokerage models such as Otkritie’s to access the RUB market will drive more openness in the market in Russia. In the past, only a few VIP corporate clients of banks were able to trade RUB at exchange, and only on behalf of a domestic bank – never directly like they can now with us.”

However, Russian government restrictions on the ownership of domestic assets by foreign firms, as well as foreign company access to the country’s market in general, is still causing corporates and other foreign investors to shy away.

Now though, the Central Bank of Russia (CBR) could be planning to dramatically alter the Russian FX investment landscape, says BNP Paribas chief economist for Russia and CIS Julia Tsepliaeva.

CBR first vice-chairman Alexei Ulyukaev announced on Thursday that the bank could abandon in 2015 the long-standing FX corridor for the RUB.

A move by the CBR to drop the operational exchange-rate band, which has a floating floor and ceiling rather than fixed limits, has been rumoured for some time.

 The RUB FX corridor

 Source: BIS

However, Tsepliaeva says Ulyukaev’s announcement is important because the CBR typically refrains from stating concrete deadlines for its plans.

“The schedule looks realistic from our point of view,” says Tsepliaeva. “The CBR has already drastically reduced volumes of its FX interventions and substantially widened the corridor. Although a transfer to a purely free-floating FX regime may not materialize in three years, we expect the CBR to continue liberalization.”

The CBR introduced the exchange-rate corridor for the RUB in the aftermath of the financial crisis amid wild fluctuations in the price of the currency.

The RUB saw several years of strong appreciation before 2008 as a result of record-high global prices for Russia’s main exports: oil and gas.

High inflation and interest rates in Russia also contributed to a strong RUB pre-financial crisis, so when the RUB came under strong depreciation pressure post-crisis as export revenues fell, the currency depreciated by more than 30%.

The CBR responded by introducing its existing rate policy mechanism.

Now, Ben Wood, Otkritie Capital’s head of international DMA, says his firm’s model as a UK-based company interacting with Russian firms proves that crossing the business border into the country is becoming easier.

Wood cites the hiring of two British non-executives – Martin Graham and Niki Beattie – to the board of Micex as proof of increasing Russian FX market openness to foreign interaction.

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