The Russian Central Bank’s Foreign Currency Buying May Smooth over Volatility

On January 19, Igor Shuvalov, First Deputy Prime Minister of the Russian Federation said that the Central Bank of Russia should buy foreign currency on the market to reduce volatility of the ruble caused by growing global prices on oil and ensure higher predictability of the exchange rate of the national currency.

Igor Shuvalov’s statement is in conflict with the foreign exchange policy of the Russian Central Bank which has been pursuing of late the policy of the floating exchange rate of the ruble and inflation targeting. In the context of the floating exchange rate, the Russian Central Bank does not need to maintain the exchange rate of the ruble.

The government’s position is clear: appreciation of the national currency leads to growth in budget expenditures and reduces price competitiveness of domestic producers’ export-oriented commodities. If the Russian Central Bank starts buying foreign currency on the market, the ruble exchange rate may become more predictable.

However, the Russian Central Bank does not influence directly the ruble exchange rate. If prices on oil start to appreciate highly, the Central Bank of Russia may do nothing as the equilibrium on the foreign exchange market is achieved by market means only. If the ruble appreciates, there will higher demand on import goods and the ruble stops appreciating. That is a free market mechanism.

Mikhail Khromov, Director of the Center for Structural Studies