The economic ramifications of Russia’s invasion of Ukraine and the West’s imposition of heavy sanctions on Moscow in response are beginning to trouble Mongolia.

Four days after Russia invaded Ukraine on February 24, Bank of Mongolia (BoM) Governor Lhagvasuren Byadran told reporters that the national lender had $4.3 billion in reserves at the beginning of 2022, and that the reserves were more than sufficient. to cover seven to eight months. Yet, there have been cases of bank customers being prevented from making overseas payments of more than 4 million Mongolian tughrik (MNT) (less than $1,700) and prevented from obtaining more than $1,000 per day.

Customers were informed by their banks that the central bank had set limits on foreign exchange transactions. However, on March 21, BoM provided a statement to Ikon, a local news agency, in which it stated that no limits were imposed on FX. He said: “The Bank of Mongolia has not imposed any limits on foreign exchange transactions. It is misleading for the managers of these banks to convince their customers that the Bank of Mongolia has imposed such limits. The Bank of Mongolia will send a warning to banks that have decided to restrict foreign exchange.”

The BoM has suggested that individual banks may have set their own limits on the amount of dollars that can be withdrawn, taking into account their internal reserves.

Whatever the facts here, there is no doubt that the Ukrainian crisis is testing the Mongolian economy. Inflation has hovered around 13% since January and in February it exceeded 14%. The central bank said in early January that inflation would decline as soon as exports resume, but China’s strict ‘zero-covid’ policy continues to make it difficult for Mongolia to ship minerals and coking coal to its giant neighbor, putting a great impact on the country’s economic performance.

Since the start of the Ukrainian war, the MNT has depreciated significantly from $2,842 to $2,910. Given the global price increases, the central bank is now considering the next step it could take to ensure that the domestic currency does not depreciate further. He remains adamant that he does not want to deploy reserves to reinforce the tughrik. But the situation is getting worse. Some FX outlets have stopped selling dollars or are selling for at least 3,100 MNT.

There are also stories of people exchanging huge sums of rubles for US dollars.

At a press conference called to address public concern over inflationary pressures, Lhagvasuren said: “Uncertainty has arisen in the economy. In 2021, the balance of payments showed a deficit of $220 million. This year, we started the first month with a deficit of $500 million. This was due to a growth in imports, post-Covid economic growth. And with this war, it is certain that the balance of payments will be in deficit by the end of the year.

After the conflict broke out and the Russian ruble fell in the face of the sanctions response, some Mongolian economists called for a halt to ruble trading, but the BoM did not issue an order. The central bank, however, made it clear that the exchange of rubles in the country had increased since the invasion. He said: “If we look at the average amount of transactions in rubles from 2019 to today, a maximum of $30 million in rubles was used for payments and exchanges in the country. [on a monthly basis]. A total of $92 million in ruble transactions have been made since the beginning of this year until March 18. Also during this period, the amount of rubles purchased amounted to 4.2 million dollars. This shows that the amount of rubles bought by banks in the domestic market is much lower than the amount sold. »

To preserve reserves, the BoM is working on limitations – a restriction could see limits placed on the import of luxury goods, including cars – and will monitor certain transactions. “It is only by supporting exports that we will be able to have certain foreign exchange reserves. Measures must be taken to bring mining products to market. In today’s auction, the banks asked for $162 million, but we submitted $50 million,” the central bank noted on March 22.

Banks, the central bank said, used to send foreign currency payment information once a month. “However,” Lhagvasuren added, “we now receive daily information on all transactions worth more than $50,000, in order to exercise control over the purposes for which [hard] the currency is transacted abroad. A contingency plan is needed if the NTM continues to depreciate.”

Lhagvasuren also suggested that for Mongolia to maintain steady economic progress, the government needs to postpone some of its goals. “Some of the investments from the state budget have to be postponed this year,” he said. “It is necessary to reduce the costs that cannot be borne, [such as with] construction works that have not yet been commissioned.