International Reserves are Mostly Spent in Vein

According to the data as of October 28, banks' debt to the Central Bank of Russia on REPO deals increased to Rb 2.9 trillion, while the debt on other loans amounted to Rb 2.9 trillion, too. It is to be noted that in a situation of the ruble depreciation the liquidity provided by the Central Bank of Russia immediately gets into the foreign exchange market and exerts further pressure on the ruble.

So, the Central Bank of Russia keeps spending reserves on slowdown of depreciation of the ruble. In our view, such a policy only speeds up devaluation expectations of economic agents, thus protracting the period of weakening of the ruble exchange rate. It is to be noted that international reserves are mostly spent in vein.
It is to be noted that the Central Bank of Russia intends to carry out on October 29-30, 2014 the REPO auctions on provision of US dollars for 28 days and 1 week. As a security of REPO deals, all the securities included in the Lombard list of the Central Bank of Russia, except for shares, can be used.

The above operations are aimed at promotion of banks' abilities to manage short-term liquidity in a situation of higher demand on it. Theoretically, the above measure may reduce the pressure on the ruble exchange rate, however, the minimum interest rate at the above auction will amount to 2.4% per annum which is higher than market interest rates on such instruments.

It is to be reminded that on September 30, the Central bank of Russia already provided commercial banks the foreign currency in the amount of $581.4m through currency swap operations, while on October 2, October 3 and October 7 the amount of such operations amounted only to $473.1m, $285.0m and $137m, respectively, with the limit of $1bn. The above deals were not very popular with banks due to a high level of interest rates.

Generally, in our view, the best decision for the Central Bank of Russia is a prompt switchover to a floating exchange rate of the ruble and abandonment of currency interventions.

Pavel Trunin, PhD (Economics), Director of the Center for Macroeconomics and Finance