Exposing The Ruble Trade That Made Billions

"In war, normally two entities make money... arms dealers and banks"

• Sanctions following the outbreak of war meant a dislocation between onshore and offshore Ruble prices.

• Large banks were able to get imaginative and trade via intermediaries located in non-sanctioned countries.

• The process of selling RUB in the more valuable onshore market helped to boost the margin made.

Last year saw elevated volatility in financial markets with the Russia/Ukraine conflict. Perhaps none was more pronounced that the swings in the FX space, with the Russian Ruble (RUB) whipsawing lower. In the space of just a couple of days the USDRUB price almost doubled:

Trading exotic currencies is already known to be fraught with problems (ask anyone who has been active on the Turkish Lira), but this was unique with the RUB due to the difference in the onshore and offshore marketplaces.

Add into the mix sanctions and liquidity, and you’d be forgiven wanting to stay well away. However, some banks were able to concoct a clever way to trade the Ruble almost risk free, banking an estimated $6bn in revenue last year.

Here’s the story.

Understanding RUB trading

Most major currencies trade over the counter (OTC) in the sense that market makers at banks create a bid and offer price. Although there is technically no central exchange, the bid/offers converge in order to make a competitive market naturally.

With RUB, for decades things have been a little different. Sure, you could call your dealer in London for a price on RUB and trade it like any other currency. This is the offshore market.

Yet there also exists an onshore market, whereby the currency was traded on the Moscow Exchange.

To prevent arbitrage, the onshore and offshore markets typically traded at almost identical levels. That was…until the war kicked off.

Sanctions mean thinking outside the box

With the onset of the war last year, the West imposed a variety of sanctions on Russia, aimed at hurting the economy.

As part of being incredibly tricky to trade Russian securities such as stocks or funds, the main offshore flow was to try and sell RUB (and the attached denominated asset) at any price and buy USD or GBP.

Add into the mix the general sentiment of this being a large negative for Russia in general, and RUB sharply weakened in the days following the initial invasion.

Putin responded with some capital controls and forced purchases of RUB, but due to being cut off from the global financial system, this was all done via the onshore RUB market.

This created a large difference between a weaker RUB in the offshore market versus the one in Moscow. And it got traders thinking…

We should do business more often

Some traders realised that countries such as Kazakhstan and Armenia didn’t impose sanctions on Russia. This meant that trading in the onshore market was still open and liquid.

These local entities (with some banks actually named e.g Raiffeisen Bank and AK Bars) were able to sell RUB at a higher price onshore than offshore. Given this fact, they would be able to add a spread and buy the RUB from a larger international bank.

Yet the price at which these large players were selling RUB was still cheaper than the offshore market. So from here, another spread could be added on and a market maker could then offer to buy RUB from a Western client.

Given the amount of clients that were scrambling to sell RUB, this margin was much higher than in normal market conditions.

Below is a made up scenario of how the whole trade could have worked:

Client A / UK Bank (UB) / Armenia Bank (AB) / Moscow Exchange (ME)

Bloomberg Chat:

Client A: I’m needing to urgently sell RUB 100m, buy USD

UB: Ok let me get you a price

UB: hihi, price pls I buy RUB 100m sell USD

AB: ok two secs

AB: hihi, price pls I sell RUB 100m buy USD

ME: hihi 65.50 bid

AB: done

UB: you got me a firm price?

AB: 66.5 bid

UB: done

Client A: how’s it going?

UB: I can sell your RUB at 67.50

Client A: done

The local bank buys RUB at 66.50 and sells it at 65.50, netting a cent profit. The UK banks buys RUB from the client at 67.50 and sells it to the local bank at 66.50, also making a cent.

Not illegal, but highly profitable

According to data just out from Vali Analytics, the combined Ruble trading revenue of the 100 biggest banks last year was $6bn. This compares to $2bn in 2021, a figure that has been roughly the same for the past few years.

It highlights the staggering increase in revenue generated from activities such as the above mentioned trading strategy.

Granted, some of this revenue was also made in more conventional market making activities, either on just the onshore or just the offshore market. Yet it certainly highlights the out of the box ways to both provide liquidity and generate a profit from some of Wall Street’s big hitters.