The Bank of Russia Continues to Modify Its Exchange Rate Policy Framework

On 10 December, the Bank of Russia reduced the accumulated amount of its FX interventions related to an automatic shift of the upper and lower boundaries operational band by 5 kopecks, from $ 400m to $ 350m. This decision marked yet another step towards a more flexible exchange rate, made by the regulator in the framework of the planned shift, in 2015, to a floating exchange rate.

It should be noted that the previous adjustment of the operational band had been made only three months before, on 9 September, when the Bank of Russia decided to cut the accumulated amount of its FX interventions to $ 400m from $ 450m (the margin set in July 2012).

Moreover, it must be reminded that, in October 2013, in addition to further broadening the boundaries of the 'neutral' floating operational band from Rb 1 to Rb 3.10 and cutting the daily scale of its targeted currency interventions to $ 60m, the Bank of Russia transformed its exchange rate formation mechanism, whereby the Treasury's currency exchange operations became neutral with regard to the ruble exchange rate's fluctuations.

As a result of the regulator's activity aimed at improving its exchange rate policy framework, the ruble's exchange rate became more sensitive to the effects of market factors determining the demand/supply ratio on the domestic market for foreign currencies. By limiting its interference to measures designed to smoothen any excess volatility of the exchange rate, the Bank of Russia is consistently easing its control over the domestic currency market.

And, although in such conditions the ruble's exchange rate will inevitably become more volatile, thus increasing the exchange rate risks for economic subjects, the planned and consistent character of the regulator's acts will make it possible for the business community to adequately adapt to the new economic situation.

A.M. Kiyutsevskaya – Senior Researcher