Minfin’s measures may further weaken the ruble exchange rate

The Federal Treasury began on February 20, 2014, according to the information available on the official website of the Ministry of Finance (Minfin) of Russia and the Federal Treasury, to conduct foreign exchange purchase transactions in the domestic foreign exchange market with a view to replenishing the Reserve Fund contribute with extra federal budget oil and gas revenues.


There is a plan to purchase foreign exchange in an amount equivalent to Rb 212,2bn before the end of May 2014. 


It was in June 2013 when the Minfin of Russia announced for the first time that it is ready to independently buy foreign exchange to replenish the Reserve Fund.  Foreign exchange purchase/sale transactions using the resources of the Reserve Fund were previously conducted directly by the Bank of Russia within the total volume of foreign-exchange transactions conducted by the Bank. It is assumed, according to the information on volumes and dates of foreign-exchange transactions available on the Federal Treasury’s official website, that the Bank of Russia will adjust the amount of its interventions in the domestic foreign exchange market in order to flatten volatility of the exchange rate. Bank of Russia’s total volume of transactions in the domestic foreign exchange market includes interventions aimed at flattening volatility of the exchange rate and replenishing/spending the resources of sovereign funds. Furthermore, while the Bank of Russia and the Federal Treasury conduct opposite transactions, the Bank of Russia will conduct net-based transactions in the domestic foreign exchange market.


The Federal Treasury, according to the preliminary information posted on its official website in October 18, began on October 23, 2013 to conduct independent transactions pursuant to the new procedure . Federal Treasury spent Rb 2bn daily on purchasing foreign exchange in the period of October 23 thru 29, 2013, of which Rb 900m were spent on buying US dollars and euros, Rb 200m on British pounds. A total of Rb 10bn was spent on purchasing foreign exchange using the federal budget resources in October 2013. 


The Federal Treasury plans to daily purchase foreign exchange (US dollars, Euros, and British pounds) in an amount equivalent to Rb 3,5bn in the period of February 20, 2014 thru the end of May 2014 . An amount in US dollars and euros equivalent to Rb 1,575bn, in British pounds to Rb 0,350bn will be spent daily in the period of February thru March 2014 pursuant to the presented plan of foreign exchange transactions. For instance, the Bank of Russia, according to the preliminary data available, sold on February 20 an amount in foreign exchange equivalent to Rb 14,24bn, of which Rb 10,74bn were spent on flattening the ruble exchange rate and Rb 3,5bn on converting the budget funds.


It is crucially important that the volume of accrued interventions altering the range of transactional interval is the difference between the Bank of Russia’s foreign exchange purchase transactions conducted in the domestic foreign exchange market and the Federal Treasury’s foreign exchange purchase transactions aimed at replenishing the Reserve Fund. In this respect, the amount of Bank of Russia’s accrued interventions, which automatically shift by 5 kopeks the range of trading band, will be reduced by another $100m from $350m, which has been in force since December 10, 2013, to $250m, thereby increasing further the role of market-driven factors in the exchange-rate regime.


In our opinion, given the tense situation in the foreign exchange market, the measures taken by monetary authorities are ill-timed and might further weaken the ruble exchange rate. 


Kiyutsevskaya A.M., a senior researcher