The Bank of Russia Has Raised the Upper Margin of the Bi-Currency Basket Corridor

As a reminder, since November 2008 the CBR has been gradually lowering the exchange rate of the Rb. vis-à-vis the bicurrency basket. That was associated with a drastic aggravation of the state of affairs in the foreign trade area steered by the global financial crisis, which resulted in the private capital flight out of Russia and tumbling prices for major Russian exports. With a considerable fall in the flow of forex-denominated revenues into the country, keeping the past exchange rate could be possible over only a limited period by means spending the nation’s foreign reserves. In the circumstances, as the CBR was pursuing a gradual depreciation of the national currency’s exchange rate, buying foreign currencies for economic agents has become a relatively low-risk and high-yielding investment instrument, which was generating an increasingly growing demand for foreign currencies. Accordingly, for the CBR, that meant the necessity to spend increasingly growing amounts of its foreign reserves.

We believe that a single-step depreciation of the Ruble’s exchange rate with a subsequent keeping of a newly declared level appears the best option in the current situation, as it enables the CBR to keep its reserves and lower depreciation expectations. Meanwhile, to make this policy a success, the key factor is the CBR’s commitment to maintain the new rate. Let us note that such a commitment in many ways is determined by preciseness with which the CBR estimated the equilibrium rate of the Ruble in the current macroeconomic conditions. By our estimates, the CBR’s current level of support of the Ruble finds itself being fairly close to a value which would allow counterbalancing demand and offer on the forex market. However, the global financial crisis makes it difficult to accurately estimate numerous factors, which is why in the event prices for energy sources are further down, the CBR will be compelled to further depreciate the Ruble’s exchange rate.

Let us also note that to facilitate the task of maintaining the new rate, the CBR announced it would be ready to undertake measures aimed at restricting the capital flight. These measures are most likely to include cutting down volumes of liquidity available to commercial banks, raising interest rates, as well as some administrative measures, such as a compulsory reservation by legal entities of a fraction of funds they are going to get out of the country, and a compulsory sale by exporters of a part of their forex-denominated gains.

P. Trounin, Head, Department of Monetary and Credit Policy