V. Katasonov: On manipulations in the world currency market

2024 Author: Seth Attwood | [email protected]. Last modified: 2023-12-16 15:55

In my article "On monetary policy in the context of economic sanctions," I formulated the thesis: the Russian ruble should in no case become an international currency, with the help of which Russia could carry out its settlements with other countries. This is how the recent statement by Deputy Foreign Minister Sergei Ryabkov was interpreted, who said that in the face of tougher economic sanctions, efforts should be intensified to free themselves from dollar dependence.

It is certainly necessary to get rid of such dependence, but not by replacing the US dollar with the Russian ruble in international settlements.

Moreover, the Russian ruble should be prohibited from going beyond the borders of the Russian Federation at all, it should be an exclusively national currency. Such a ban is an important, although not the only condition for ensuring the financial and economic stability of the state.

My thesis is based on the practice of the state currency monopoly tested by the Soviet Union: the Soviet ruble was exclusively domestic money, and the USSR carried out external payments mainly with the help of the dollar, franc, pound sterling and other freely convertible currencies. Later, in economic relations with the countries of the socialist camp, the transferable ruble, the supranational currency within the Council for Mutual Economic Assistance (CMEA), became the main currency. Currencies of economically less developed countries and gold could be used as exotic means of payment. In most cases, bilateral and multilateral clearing was used, which reduced the need for foreign exchange. The export of the Soviet ruble outside the country was prohibited.

To make it clearer the threats that arise when the ruble leaves the country, I will briefly describe the structure of the modern foreign exchange market. It is also called the FOREX market, from the English. FOReign EXchange - an interbank currency exchange market at free prices. Operations in this market can be trading, speculative, hedging (leveling risks) and regulatory (foreign exchange interventions of central banks). A powerful impetus to the rapid growth of the foreign exchange market was given by the transition from the Bretton Woods monetary and financial system to the Jamaican one in the 70s of the last century. At the 1976 Jamaican Conference, it was decided to abandon fixed exchange rates and move to market-based exchange rates. Fluctuations in exchange rates, on the one hand, have complicated world trade and economic development, on the other hand, have become fertile ground for speculative profits. Under the Bretton Woods system, the foreign exchange market also existed, but it was tightly regulated, excluding large-scale speculation. Exchange operations on it provided 90% of world trade and related economic activities.

In 1977, the daily turnover in the world foreign exchange market was, according to the Bank for International Settlements (BIS), $ 5 billion. Ten years later, in 1987, the daily market turnover grew 120 times and reached $ 600 billion. At the end of 1992, the daily turnover exceeded the level of 1 trillion. dollars. In 1997, the figure was 1.2 trillion. dollars, in 2000 - 1.5 trillion. In 2005-2006, the daily turnover in the FOREX market fluctuated, according to various estimates, from $ 2 to $ 4.5 trillion, in 2010 it amounted to $ 4 trillion. In the first half of this decade, the daily turnover, according to the BIS, fluctuated around the level of 5 trillion. Doll. That is, over three to four decades, the turnover in the foreign exchange market has grown by three orders of magnitude (1000 times!). By 2020, according to experts, the daily turnover in the FOREX market may reach $ 10 trillion.

Operations in this market are carried out through a system of institutions: central banks, commercial banks, investment banks, brokers and dealers, pension funds, insurance companies, multinational corporations. FOREX differs significantly from other financial markets, it assumes the absence of government intervention in the conclusion of exchange transactions (there is no official exchange rate, there are no restrictions on the direction, prices and volumes of transactions). Some rules govern, first of all, the relationship between the client (trader) and the intermediary (broker). In general, the foreign exchange market can be called over-the-counter and global without a stretch. Unlike, say, the credit or stock markets, which still continue to be controlled by national supervisory authorities and retain some isolation. You can enter the stock market if you have at least $ 100 in your pocket; in the foreign exchange market, everything is different. The minimum transaction size on the FOREX market is in the range from 500 thousand to 1 million dollars. Many Russian citizens do not even suspect that this very bank can play with their money deposited on the deposit of a commercial bank. Since the FOREX market is almost exclusively speculative, they usually play here not for their own money, but for borrowed money.

The foreign exchange market closely overlaps with the market for financial derivatives (derivatives): a significant part of transactions here are made not in the form of spot transactions (immediate delivery of currency, direct currency conversion), but in the form of options, futures, swaps, etc. This is already something like a gamble, a bet. The stake is placed on receiving a premium, and the real delivery of currency occurs as an exception. Nevertheless, such virtual transactions can (and do) have a significant impact on currency quotes.

The FOREX market is tough. It is believed that up to 80% of newcomers to this market lose money invested within six months. And within a year, about 96% of market investors lose all their investments. I recently came across an even harsher assessment: the number of losers ranges from 97% to 99% of the total mass of traders in this market. At the same time, ensuring a constant influx of newcomers is the most important condition for the smooth functioning of the market.

And the winner in the market is the one who possesses insider information, who plans and organizes operations. All the talk that the foreign exchange market is the freest and most unregulated is designed for millions of potential newcomers who must bring money and voluntarily give it to the market-makers, which are central banks and some of the largest private banks. Concerning the question of the owners, according to the BIS survey for April 2016, certain types of currency accounted for (%): US dollar - 40, 30; euro - 18, 70; Japanese yen - 10, 80; British pound sterling - 6.40; Australian dollar - 3.45; Canadian dollar - 2, 55; Swiss franc - 2.40; Chinese yuan - 2. 0. The Russian ruble in this list took 17th place with a share of 0.55% (between the Turkish lira and the Indian rupee).

The main players in the global currency market are the US Federal Reserve System, the European Central Bank (ECB), the Bank of England and the Bank of Japan. The currencies issued by these central banks account for 76.2% of all transactions in the world foreign exchange market. These central banks coordinate closely (with the participation of an intermediary such as the Bank for International Settlements in Basel). In particular, measures are being taken to minimize rate fluctuations within their “currency pairs”: US dollar - euro, US dollar - British pound; euro - British pound, US dollar - yen, euro - Swiss franc, etc. One of the instruments to reduce the volatility of currencies of the countries of the "golden billion" are agreements on currency swaps (currency exchange) between their central banks for the prompt implementation of foreign exchange interventions and stabilization of rates.

Until 2011, unlimited swaps between leading central banks were open for 7 days. In the fall of 2011, the US Federal Reserve, the European Central Bank (ECB), the Bank of Japan, the Bank of England, the Bank of Switzerland and the Bank of Canada ("six") agreed to coordinate actions to ensure the liquidity of the global financial system by extending currency swaps for up to 3 months. Finally, on October 31, 2013, the Six agreed to permanently transfer temporary currency swap agreements. In fact, the international currency pool was born. Six of the world's leading central banks have established a coordination mechanism that will allow them to quickly build up liquidity in participating countries in the event of a deteriorating market situation and in the event of serious disturbances in the foreign exchange markets. Some call the "Six" agreement a world currency cartel of central banks, which could become the prototype for a future world central bank. The Six acts in a consolidated manner in relation to the countries that are not part of this club of the “chosen ones”. Skeptics reasonably believe that it is already pointless to discuss the possibility of developing a common monetary policy within the G-20. The volatility of currencies outside the "six" is significantly higher than that of the currencies of this cartel. Moreover, the volatility of peripheral currencies, to which the Russian ruble belongs, is deliberately stimulated, on which a lot of money is made. And the insecurity of peripheral currencies makes the economies of the respective countries unprotected.

The central banks of the "six" operate in close coordination not only with each other, but also with the largest private banks, funds and other participants in the foreign exchange market. The leading traders on the FOREX interbank market are (share of total turnovers in% as of May 2016; in parentheses - the bank's country of origin): Citi (USA) - 12, 9; JP Morgan (USA) - 8, 8; UBS (Switzerland) - 8, 8; Deutsche Bank (Germany) - 7, 9; Bank of America Merrill Lynch (USA) - 6, 4; Barclays (UK) - 5, 7; Goldman Sachs (USA) - 4, 7; HSBC (UK) - 4, 6; XTX Markets (UK) - 3, 9; Morgan Stanley (USA) - 3, 2.

These ten banks account for 2/3 of the FOREX market turnover. These are the very market-makers who never lose and regularly collect tribute from the “amateurs”. There are five US banks in this top ten, they account for 36.0% of the FOREX market turnover. Then three British banks and one bank each from Switzerland and Germany. All of these banks are closely related to the respective central banks, they do not have any problems in order to receive from the central banks the required volumes of currency for conducting operations in the foreign exchange market.

In recent years, there have been cases of manipulation of exchange rates by large banks. Thus, British HSBC, Barclays and RBS, Swiss UBS, American JP Morgan, Citigroup and Bank of America were caught in the manipulations. The amounts of fines for such manipulations, assessed by the financial regulators of the USA, Great Britain and the EU, are measured in many billions. The essence of the manipulations was that banks falsified information about transactions and manipulated the flow of client orders to buy and sell currencies.

However, financial regulators do not want to see the forest for the trees. After all, there is a strategic manipulation of the rates of national currencies on a global scale, in which the leading central banks of the countries of the "golden billion" participate. The fundamental distortion that they achieve through manipulation is the overvaluation of the dollar, euro, British pound and other "select" currencies in relation to peripheral currencies. In this they are assisted by the central banks of peripheral countries, buying up "selected" currencies. Such a purchase is covered by the legend that life on earth is impossible without the constant accumulation of foreign exchange reserves. Many peripheral central banks are actually playing against their national currencies on the side of the Fed, the ECB, other "select" central banks and the owners of the money behind them.