The Central Bank Should Consider Extension of the Terms of a Currency Swap Transaction

On October 30, the Central Bank of Russia renewed currency interventions because the ruble exchange rate hit through the upper limit of the band. It is to be noted that the Central Bank of Russia changed the mode of supplying foreign exchange to the market having given up direct sales of the foreign exchange and carried out one-day currency swap deals in the volume of $581.4m.

The regulator started currency swap deals on September 17 to ease tensions on the foreign exchange market. That instrument was meant to narrow the gap between supply and demand on specific days which has nothing to do with supply of the foreign exchange for a longer term. However, until September 30 that instrument was not required at all which fact can be explained by the following two reasons: either banks did not need foreign exchange in that period of time or they bought it for future use as it was disadvantageous to do that by means of currency swap transactions implying payment of interests.


At present, the prospect of extension of the terms of a currency swap with settlement today/tomorrow is discussed. In a situation of a further threat to stability of the financial system on the part of sanctions, the Central Bank of Russia should consider extension of the terms of a currency swap deal. However, the above instrument should be applied only in case of dramatic fluctuations of the ruble exchange rate.


It is to be noted that such a policy is not in conflict with inflation targeting as dramatic fluctuations of the exchange rate affect the level of the inflation rate, that is, interventions are admissible if there is a threat of a change in economic agents' inflationary expectations. It is the policy of regular predicted interventions that is in conflict with inflation targeting and that policy should be avoided by the Central Bank of Russia.


Generally, the present fast depreciation of the ruble exchange rate is related to a number of factors.


Firstly, an economic uncertainty related to imposition of Western sanctions against Russia produces a great pressure. Such a situation creates higher risks to ruble assets and incites households, corporations and banks to invest in foreign currency.


Secondly, the policy of the Central Bank of Russia to switch over to inflation targeting and the floating rate has resulted in the fact that in the past six months the Central Bank of Russia did not carry out interventions and the ruble exchange rate was actually formed by the market. In a period of a switch over to a floating rate and inflation targeting, the ruble will be under pressure next year as well because economic agents test the reaction of the Central Bank of Russia to their behavior.


Thirdly, the exchange rate is always sensitive to oil prices which currently go down. However, so far there are no grounds to assert that oil prices have decidedly moved downwards.


Fourthly, the corporate foreign debt produces an additional pressure on the national currency. According to the data of the Central Bank of Russia, before the end of the year companies have to pay about $40bn of the foreign debt. At present, the demand on foreign currency on the domestic market grows as due to sanctions it is impossible to get refinancing on the external market.


However, it is not necessarily that within Q4 companies have to buy $40bn on the domestic market. The thing is that many legal entities have foreign assets and can repay debts without resorting to buying new foreign exchange on the domestic market. Also, loans of offshore companies whose debts can be rolled over and do not require purchasing of foreign exchange on the domestic market to repay them account for a portion of that debt.


In addition to the above, it is important to point out that banks' and companies' foreign assets are rather big and they have plenty resources to pay debts to creditors. However, in economic and financial uncertainty and geopolitical instability companies are not prepared to spend to the last cent the resources available to them.


Sergei Drobyshevsky, Doctor of Economics, Academic Director