Central bank’s forex purchases will have minor effect on rouble exchange rate

On Friday 3 February, Russia’s Ministry of Finance amplified its plans on purchasing foreign currency in the domestic forex market, specifying the terms and the maximum amount to be purchased. An official statement was made, in which the regulator plans to allocate another Rb 113.1bn of oil and gas federal budget revenues for the purpose.

An amount equivalent to Rb 6.3bn will be purchased every working day in the period between 7 February and 6 March. On the one hand, this is a small amount, compared with Russia’s forex market average daily turnover, which ran at $40.6bn in 2016, according to the Bank for International Settlements (BIS). On the other hand, forex market interventions may at some periods distort the market equilibrium, having an adverse effect on the Russian rouble. Given the fact that if the Ministry of Finance is going to purchase foreign exchange on a monthly basis (the Ministry stated previously that foreign currency should be purchased when crude oil stays above $40 per barrel), currency interventions would reach about $20bn before the end of the year, which is comparable with Russia’s current account balance.

It is in our view unlikely that such interventions will have a significant effect on the dynamics of the market-driven rouble exchange rate. Exchange rate trends in the global forex market are being driven by various factors, including a high degree of uncertainty about Donald Trump’s economic policy, who says that a strengthening U.S. dollar has an adverse effect on the U.S. economy, as well as the prospects of further hikes in the Fed's federal funds rate.

The effect of ambiguous information signals concerning the “need to devaluate the rouble in order to balance the federal budget” seems to be more significant compared to what the Ministry of Finance is doing in practice. From this perspective, we should emphasize once again that the Ministry of Finance is not seeking to establish any specific level of exchange rate through purchasing foreign currency. Regarding the Bank of Russia that has the exclusive right to run the exchange rate policy in this country, this would mean nothing short of the bank switching to an entirely new monetary policy and abandoning its inflation targeting policy, which is not in line with regulator’s actions and statements. For instance, the Bank of Russia gave an assurance on 25 January that the bank has no plans to change its current monetary policy, including the target to be reached by the end of 2017 and restart of forex market interventions in order to reach a particular level of the nominal exchange rate. Furthermore, according to the Bank of Russia, the use of budget rules on a regular basis will facilitate the monetary policy, ensuring stable and predictable terms for economic development, as well as less reliance on commodities. The only reason that may force the Bank of Russia to restart its forex market interventions is to ensure financial sustainability or to accumulate foreign exchange reserves, which is in line not only with the inflation targeting principles but also with the global practice.

Hence, it is in our view highly unlikely that foreign currency purchases by the Bank of Russia on behalf of the Ministry of Finance will have a significant effect on the dynamics of the rouble exchange rate. However, the decision made could have been better clarified for economic agents.

Anna Kiyutsevskaya – researcher, Monetary Policy Department