Navigating Economic Turbulence: Is It Prudent for Businesses to Hedge Currency Risks in 2025?
Chasing Stability: The Belarusian market is just starting to delve into hedging tools, but the appetite for managing currency risks among businesses is quickly growing.
Managing currency risks has never been more relevant for Belarusian importers, exporters, and firms with foreign currency revenue. Currency volatility, inflationary pressures, and limited access to international financial instruments make hedging an absolute necessity. A well-crafted strategy can not only safeguard the budget but also pave the way for financial robustness.
Myfin.by chatted with Alexei Smirnov, head of the investment products sales department at LLC "Aigensis", about the tools businesses can employ for hedging today and techniques to shield against potential currency shocks.
- I've been hearing buzz about unparalleled demand from Russian businesses for currency risk hedging. What's going on in the Belarusian market?
Here's a crash course on currency risk hedging: it's the use of specialized financial instruments or strategies to protect businesses from potential losses due to currency fluctuations. The main goal is to secure the cost of currency obligations or receipts and minimize uncertainty in financial results.
Available instruments include:
- Futures: standardized contracts to buy or sell currency at a future date via an exchange.
- Options: the right (but not the obligation) to buy or sell currency at a preset price in the future (on an exchange or OTC market).
- Forwards: agreements to buy or sell currency at a future date at a locked-in price.
- SWAP deals: an exchange of currencies with a commitment to reverse the exchange at a later date under agreed terms (used in interbank trading).
- Currency time deposits: an indirect way to reduce risk by locking in the yield in foreign currency.
For now, currency risk hedging in Belarus remains relatively undeveloped. Businesses do have access to exchange trading, but there are only a few specialized hedging tools available. Primarily, it's individual solutions through banks like forward deals and SWAP deals for a limited clientele.
- It's been said that the cost of hedging on the futures market directly depends on the current level of ruble interest rates, which are high. Does this mean hedging can't be affordable then?
Indeed, the cost of hedging mirrors the level of interest rates in the national currency. Currently, Russian ruble rates are sky-high - as of April 2025, the Central Bank of Russia's key rate stands at 21% annually. This translates to expensive protection against currency risks.
To delve deeper, hedging is usually constructed through two transactions: Spot (buying or selling currency "as is") and a forward contract (for future). The cost of a forward contract includes expenses on ruble resources.
Why does this occur? The difference in interest rates between the ruble and the dollar directly impacts the cost of hedging. For example, if the ruble rate is 21% per annum and the dollar is around 5%, the 16 percentage point difference is reflected in the forward rate. In other words, the futures price of the dollar in three months will be higher than the current rate by approximately 3.9%. This is the inherent cost of the difference in currency yields.
- Is it advantageous for importers to open hedging positions currently?
Absolutely. Increased currency volatility, inflation, and economic sanctions intensify business risks. Although the economy has adapted, protecting the budget from currency fluctuations is of utmost importance today.
- As a broker, can we lower costs on funds clients deposit as collateral for trading on the futures market?
We accept high-liquidity assets as collateral, predominantly cash. However, in specific instances, it's feasible to employ federal loan bonds (for example, OFZ-PD 26234 with maturity in July 2025), which are traded with a yield of around 20.77% per annum.
- Given the interest income on collateral, is hedging with exchange-traded futures generally cheaper than bank forward contracts for currency?
This depends on the conditions of the banks and the market. However, the presence of interest income on collateral enables a reduction in the overall cost of hedging, making exchange-traded instruments often more attractive.
- Companies are currently concerned about short-term deposits due to high interest rates. In this case, what separates exchange-traded instruments from bank overnight deposits?
Bank deposits (overnight) and exchange-traded instruments can complement each other in a company's liquidity management strategy. Overnight deposits are a classic choice for short-term placement with minimum risk. They are practical for short-term placement but often yield less than market-based alternatives.
Exchange-traded instruments, such as bonds from reliable issuers on the Belarusian market, give businesses more flexibility in managing placement terms - from 7 days and beyond - and the potential to achieve higher yields: currently, they range from 12.5 to 21% annually, depending on the investment term. And these are tax-free earnings.
- What is the entrance threshold for the exchange repo service with a central counterparty, which is similar to a bank overnight? What are its advantages?
Exchange repo with a central counterparty is a convenient tool for managing short-term liquidity. It works similarly to a bank overnight but through the exchange.
Previously on the Belarus Currency and Stock Exchange, two distinct brokers were necessary for any repo transaction: one client worked with one broker, the other with another. This made the process complex. Now, with the introduction of a central counterparty, it's simpler: all calculations can be made through a single broker. The exchange itself acts as a guarantor of the fulfillment of obligations, so there's no need to find and coordinate a second transaction participant.
On the Moscow Exchange, repo transactions are available with terms from 1 day to 3-6 months. The yield on such operations is usually 1-2 percentage points lower than the key rate. With the current key rate in Russia of 21% per annum, the effective yield on repo is on average 19-20% per annum, depending on the collateral, transaction term, and market conditions.
The entry threshold for repo transactions is as low as 100,000 Russian rubles, making the tool accessible even for medium-sized businesses.
- For larger companies with substantial account balances, is a bank overnight still more profitable?
For placement terms of up to a week, a bank overnight may still be more profitable due to additional expenses on exchange transactions, such as brokerage commission and clearing fee.
- Which exchange-traded instruments would you recommend for companies with longer liquidity needs?
Our clients, mainly legal entities, frequently opt for Ministry of Finance of the Republic of Belarus bonds (WGBO). Additionally, companies proactively invest in corporate bonds issued by entities such as "Aigensis", "Activlizing", and "AVANGARD LIZING". These securities offer appealing yields and provide flexibility in the selection of placement terms and interest payment conditions. The choice of instrument depends on the company's goals.
If a company urgently needs funds, can they always "repo" their bonds?
Not all bonds are suitable for repo transactions. These typically involve the most liquid securities - Ministry of Finance bonds (WGBO).
Do you offer a liquidity support option like margin lending?
Yes, such an option is available. Margin trading on the Moscow Exchange (MOEX) supports legal entities, so we can facilitate margin lending. Such transactions require individual agreement on conditions like collateral parameters, limits, and acceptable risk levels. If asked, we're ready to discuss the possibility of connecting margin financing, considering the business's tasks and the current market situation.
Regarding the Belarusian market, theoretically, margin lending is feasible, but, to date, such transactions remain absent in practice. However, if clients express interest, we're ready to discuss conditions and find a suitable solution, taking into account the economic feasibility for the company.
- As the Belarusian market develops its hedging tools, businesses can employ various specialized financial instruments like futures, options, forwards, SWAP deals, and currency time deposits to safeguard their budget and achieve financial robustness.
- For importers, especially those dealing with international business, employing hedging strategies is advantageous as it can protect their budget from currency fluctuations, inflation, and economic sanctions.
- In terms of cost savings, exchanging traded futures can potentially be more affordable than bank forward contracts for businesses with high-liquidity assets, as the presence of interest income on collateral can help reduce the overall cost of hedging.
