Central Bank's task to make the exchange rate less volatile

The average monthly ruble exchange rate, according to the Bank of Russia’s official data on January 2014, has dropped 1.7% against the US dollar and 1.6% against the euro. As a result of steady decline the Russian currency exchange rate has lost a bit more than 4.2% against the US dollar within three months, and 5% against the euro within four months.


To compare, the ruble weakened by 34.7% against the US dollar during the acute phase of of crisis in August 2008 thru February 2009. The scope of the current decline of the Russian national currency exchange rate is therefore not of a crisis nature, although exchange rate volatility has a strong impact on macro-economic variables in an open economy without constraints to capital movement. The effect of exchange rate volatility on inflationary processes in the Russian Federation has recently been weakening, whereas the effect of declining exchange rate on output amid growth in import of raw materials, equipment and component parts isn’t clear at all. It would be wrong, under the circumstances, to downplay an adverse effect of exchange rate volatility on the Russian economy.


First, import contribution to the structure of retail goods resources is still very high (43-44%), and a substantial decline of the national currency exchange rate will, to one extent or another, have an impact on the dynamics of consumer prices, also because of high running inflation expectations among the population.


Second, behavioral factors also have a substantial impact. Devaluation of the ruble, which makes foreign exchange attractive, encourages a foreign currency oriented economy. For instance, at the 2013 year end deposits denominated in foreign exchange included into the monetary base (broad definition), net of exchange rate revaluation, increased 17.6%, whereas ruble-denominated deposits increased merely 16.4%. To compare, ruble-denominated deposits increased 13.1% in 2012 while deposits denominated in foreign exchange, net of exchange rate revaluation, gained 9.3%. Therefore, steady devaluation of the national currency amid higher flexibility of the Bank of Russia’s exchange rate policy feeding economic agents’ expectations about further devaluation of the ruble facilitates faster growth in deposits denominated in foreign currencies, thereby creating heavier pressure upon the ruble exchange rate. 


Third, growing debt burden on the industries of the national economy should be taken into account: a relative value of their indebtedness increased to 34.9% of GDP by the end of 2013 against 32% of GDP as of the 2012 year end. Non-finance and other finance corporations (insurance, leasing, investment companies), whose total indebtedness exceeded 20% of GDP by the end of 2013 against 18% of GDP in 2012, were most vulnerable to this effect. To compare, by the end of 2008 their indebtedness under external liabilities was 17% of GDP or less.


At the same time, the Bank of Russia’s gold and foreign currency reserves shrank considerably during and after the crisis, although their value is still exceeding all minimum sufficient criteria. The gold and foreign currency reserves slid down to $498,9bn by the end of January 2014 , declining $97,7bn below the post-crisis highest value ($596,6bn as of 01.08.2008 ). Furthermore, the foreign exchange reserves dropped $10,7bn in January 2014 despite regulator’s announcement of a more flexible exchange rate policy. However, according to the Bank of Russia, net outflow on the financial account (net of reserve assets) the balance of payments increased to $14,8bn in Q4 2013, reaching the highest value since Q1 2012 ($24,8bn). 


Overall, it seems that under the circumstances, given that devaluation of the Russian national currency and national currencies of other developing countries has largely been governed by external factors, the regulator’s attempts to flatten downtrends will support a speculative trend in the foreign exchange market. In our opinion, the Central Bank of Russia should aim at flattening volatility of the exchange rate rather than interfere with global trends in capital movement.


Kiyutsevskaya A.M., a senior researcher