The BR will hamper further ruble appreciation

On 14 May, the Bank of Russia announced a return to foreign currency purchases in order to replenish its international reserves in the amount of $100-200 mn per day.

Looking back, the BR in mid-November 2014 abandoned the idea to carry on regular currency foreign purchases and terminated accepted ruble price range of bi-currency basket. By doing this, the BR actually announced transition to a floating exchange rate.

As a result, the regulator conducted foreign currency purchases mainly in the periods of panic buying of foreign currency by economic agents and uncontrollable devaluation of the ruble in the first half of December 2014. Average sale of foreign currency by the Bank of Russia during 1-16 December exceeded $1 bn per day.

However, by abandoning foreign currency purchases in order to stabilize the situation on the domestic market the Bank of Russia went in for currency refinancing transactions, such as 'forex swap' and REPO in foreign currency. These transactions which indebtedness in May exceeded $37 bn also lead to a reduction of the BR international reserves. At the same time, as a result of both normalization of geopolitical situation and oil price recovery, commencing with February the ruble has been appreciating and currently quite likely has reached the level which the Bank of Russia considers fundamentally justified.

Hence, the Bank of Russia decision to renew from 13 May regular purchases of foreign currency on the domestic FX market will not so much help replenishing foreign currency reserves as will be a signal to economic agents that the BR will be blocking further appreciation of the ruble exchange rate which is taking place simultaneously with the indebtedness growth on currency refinancing transactions and, consequently, reduction in international reserves.

At the same time, we think that purchases by themselves will not significantly affect the FX market. First, purchases will be conducted in negligible volumes: not exceeding $200 mn per day. Second, they will take place evenly throughout the trading day. Third, this decision has been taken in a very favorable moment. Oil price increase and significant reduction of net capital outflow both by banks and by other sector demonstrate growing supply and weakening demand for foreign currency which supports the ruble upward trend set in March-April.

Anna Kiyutsevskaya – researcher, Monetary department