The Bank of Russia Announced on Changing the Parameters of the mechanism of Exchange Rate Policy

On 1 March the Bank of Russia announced the expansion of the operational range of valid permissible value of the ruble equivalent of the bi-currency basket fr om 4 to 5 rubles. The Bank of Russia also announced a reduction of the volume of accumulated interventions, which lead to change of operational capital by 5 kopeks, fr om 650 mln to 600 mln USD.  

Actually the expansion of the operating interval by a ruble does not have any practical meaning because major share of the change of rates happen within the interval. In the event the exchange rate the exchange rate comes to the boarder of the interval, the Bank of Russia has the power to swiftly change it. Apparently, at present in the circumstances of increased hard currency inflows into the country, the Central Bank of the Russian Federation stands ready to permit the strengthening of the ruble, refusing to realize large-scale hard currency interventions, which could lead to an increase in money supply and inflation. 
Post a decrease in maximum accumulation of interventions leading to changes in the operating range, also demonstrates a gradual increase in flexibility of exchange rate policy of the CBR. However, we continue to believe that the establishment of clear rules of the exchange rate policy of the Bank of Russia is not quite justified in terms of high dependence of Russia's economy on foreign economic conditions, as the predictability of the Bank of Russia in the foreign exchange market can create the preconditions for increasing the predictability of the exchange rate. For example, wh ere there is an increasing inflow of currency into the Russian Federation, the  players in the forex market will know that the Bank of Russia will buy a certain amount of currency, and then increase the rate of the ruble. At the same, opportunities to make money at strengthening of the ruble will rise in comparison with the situation wh ere the Bank of Russia’s activities are less predictable.

In general, the activities of the Bank of Russia testify to the phasing out of the exchange rate control in the transition to inflation targeting. However, it should be noted that the real willingness of the CBR to adhere to this policy can be tested in a fairly rapid depreciation and the presence of political pressure on the Bank of Russia to prevent the weakening of the ruble.

P.V. Trunin, Candidate of Sciences (Economics), Head of Monetary Department