Arbitrage on "soft currencies": the glass is half empty
"Soft currencies." non-convertible or restricted convertible currencies, which are subject to relatively large exchange rate fluctuations due to economic and political factors. It is opposed to hard or freely convertible currencies. Historically, in Russia and the CIS countries, such currencies are usually referred to the currencies of the former Soviet Union.
What are "soft currencies"?
"Soft currencies are an interesting high-risk and high-yield investment instrument of the interbank market. To be more precise, they did. The dawn of trade in currencies of former Soviet republics, which for the most part were not freely convertible, came in the first decade after the collapse of the Union. Currently, investments in "soft currencies" are practically nonexistent due to various legal restrictions, although there are glasses with "soft currencies" on the Moscow Stock Exchange even today - the Belarusian ruble, the Ukrainian hryvnia, and the Kazakh tenge.
How to make money on "soft currencies"?
In the mid-90s, soft currency transactions provided very high margins because of the chaos in the markets. Soft currencies could change by 20% in a week. There was a dramatic depreciation of currencies, and there were situations, when someone did not comply with the conditions, and in just a few days there was a fairly large exchange rate difference. Nevertheless, this market was very interesting and very profitable.
I can think of about 20 banks that I had to deal with working with "soft currencies". It went so far that more than half of the currency transactions of some credit institutions were conducted with non-convertible currencies. The point came down to trivial arbitration - The national currencies of the CIS countries at the time were quoted with huge spreads. These price discrepancies were the basis for making profitable deals. No algorithmic robots were needed.
From personal practice - I will briefly describe a bright high-yield transaction: in 1993, I quoted the Ukrainian karbovanets to the Kazakh ruble (this is before the introduction of the Kazakh tenge and the Ukrainian hryvnia). I bought at 2, sold at 5, practically received 150% of income.
What prevents soft currency trading?
However, access to the soft currency market gradually became more and more regulated. Local restrictions in the former Soviet Union countries have led to a fairly large reduction in market liquidity. Gradually, the main settlements began to be carried out in U.S. dollars or euros. There was a mass exodus from national currencies. And one of the important reasons was the fact that many clients simply began to avoid serious currency risks.
First, settlements in Uzbek sums decreased significantly; then, settlements in Belarusian rubles. The introduction of restrictions in Belarusian legislation was explained by the fact that Russian and Baltic banks were "swaying" the country's currency. Then Ukraine introduced restrictions - it became impossible to sell the purchased hryvnia for dollars, the currency of the first category and jurisdiction. Moreover, in 2004, Ukraine was put on the list of countries that evade reporting on terrorists. Because of this there were difficulties with keeping a local correspondent account: every transaction had to be reported to a counterparty. Later, the first noisy election processes began in Ukraine, and serious political risks arose. All these local nuances made trading in "soft currencies" much more difficult. Finally, almost all transactions between Russia and Ukraine have now been stopped due to geopolitics.
Political risksThe fact that the soft currencies market has been in decline is not a minor factor, but the fact that they are almost completely overlapping yields. Nevertheless, I can say that some algotraders are still considering working with soft currencies, for example on Ukrainian trading platforms - up to the use of a local legal entity.
Unnecessary exotics
Currently, trading floors offer "soft currencies" as an additional exotic. Any private investor, in order to trade in the CIS currency market, must have a good knowledge of the product and the local information environment. Keep in mind here that this kind of information is relatively limited, and even if something happens, it is not always easy to interpret the news. Here is an example of recent events in relatively calm Armenia. It is difficult to assess what the unrest in Yerevan could have spilled over into - anything, even revolutionary processes.
Bottom line, The situation in the soft currency market in 2015 is such that it is not an easy task to buy a large amount. Moreover, not every bank in the CIS countries will let money from a client's account through to a Russian bank: the currency laws of other countries restrict many operations. And there are very few people willing to buy, for example, the Belarusian ruble. The market of "soft currencies" of the CIS countries has literally "collapsed", and in fact we can state its complete absence. Of course, some transactions take place once every six months or six months, but in general, this market, with its huge risks and spreads, is not of interest to investors yet.
This article is featured in the 96th issue of ForTrader.org magazine
Trading in currencies such as the Kazakh Tenge or the Belarusian ruble can be very expensive, but you can also get a big score.
That's what the article is about. Although, from experience, you can only risk a very small amount.