Support of the Ruble Happens to Be Too Expensive

The Central Bank of Russia has returned to the practice of currency interventions in a situation of a sudden depreciation of the ruble. Fr om the beginning of October, the bi-currency basket is traded close to the upper limit of the floating operating interval.

It is to be noted that the limit is shifted by 5 kopecks per $350m. Fr om October 1, 2014 till October 16, 2014 the Central Bank of Russia sold over $13bn, while the "currency band" shifted by Rb 1.9. On Friday, October 17, 2014, the upper lim it of the bi-currency basket's operating interval was set at Rb 46.3, while the lower one, at Rb 37.3. According to the plans of the regulator, from 2015 a switch-over to a floating exchange rate is to be completed. A lack of regular interventions will increase freedom of action by the regulator in carrying out of the monetary policy and reduce the pressure on bank liquidity.

Support of stability of the national currency is becoming too expensive in a situation wh ere foreign currency inflow to the Russian economy has decreased due to a drop in oil prices and limitation of the access for Russian companies to foreign debt markets.

So, in the 2013-2014 period, currency interventions on sale of foreign currency made the regulator build up simultaneously refinancing of the banking sector to support the required level of liquidity. From April 2013 till April 2014 included, the Central Bank of Russia sold $72bn having withdrawn Rb 2.5 trillion worth of liquidity.
Within five months of 2008–2009, the Central Bank of Russia spent over $200bn on currency interventions.

It is to be noted that exporters and the state budget benefit from the weak ruble (to be precise, it compensates depreciation of prices on export goods and the value of export duty proceeds), but an excessive depreciation of the ruble increases costs due to appreciation of import component parts and exerts pressure on consumer prices.

According to the estimates of the Rosstat, in 2014 import goods accounted for over 40% of the retail trade turnover. Consequently, in such a situation depreciation of the ruble intensifies inflationary processes. According to experts' estimates, a 10% depreciation of the ruble adds up 1.5 p.p. to 2.0 p.p. to growth in consumer prices in the next few months following the devaluation.

A long-term appreciation of the ruble can undoubtedly be related only to growth both in the competitive edge of those sectors of the Russian economy which are not engaged in export of energy carriers and the share of export of non-primary goods. In such a case, the dynamics of the Russian ruble will be less dependent on the situation on global oil and gas markets.

Mikhail Khromov, Director of Structural Research Center