Foreign Currency Interventions Grow as the Ruble Depreciates

CEIC Russia Data Talk - January 9, 2014 - The Bank of Russia implements foreign exchange policy under a managed floating exchange rate regime with the goal of providing price stability and a stable yet flexible foreign exchange rate. The significant depreciation of the ruble against the US dollar and the euro since the beginning of 2013 is reflected in the dual-currency basket rate (the operational indicator of Russian exchange rate policy - a weighted basket of 55% in US dollars and 45% in euros), which approached a four-year high of RUB 38.59 at the end of November 2013. The Bank of Russia (the central bank) responded as early as April 2013, by intervening in the currency markets to moderate foreign exchange volatility through the sale of USD 663.1 million and EUR 45.1 million of foreign-currency reserves. The currency interventions continued until December 2013, reaching peak levels of USD 5.5 billion and EUR 475.6 million in August 2013. The euro share of foreign currency sales has been comparatively insignificant in the past three years, accounting on average for 9.4% of total monthly sales. The US dollar share has prevailed in the foreign currency interventions. The sale of US dollar and euro reserves declined in September and October 2013 when the ruble rebounded slightly to RUB 37.43 and RUB 37.46 respectively against the dual currency basket, only to weaken again in November 2013. In spite of the Bank of Russia's efforts to curb significant depreciation, the ruble continued its free fall in November 2013, which also meant approaching the upper boundary of the dual-currency operational band. The floating operational band, which defines the boundaries of the ruble fluctuations under the floating exchange rate regime pursued by the Bank of Russia, was set between RUB 31.65 and RUB 38.65 from July 2012 until May 2013, reflecting relative stability and even some appreciation of the ruble during that period. However, since June 2013, due to the ruble depreciation and the consequent currency interventions by the Bank of Russia, the boundaries of the operational band have been adjusted on a monthly basis, and even more frequently towards the end of 2013 because of the accelerating ruble depreciation. The low current account surplus, negative sentiment in the foreign exchange market, and a slowing economy amid declining production are the fundamental factors which have put downward pressure on the value of the ruble. Since March 2010 – when the data related to foreign currency interventions was made publicly available – foreign currency sales and purchases have mostly balanced each other. The cumulative amount of USD sales during this period equals USD 51.6 billion, while the cumulative purchases amount to USD 70.1 billion. A similar trend is observed in the euro sales (EUR 5.1 billion) and purchases (EUR 7.4 billion). Overall, since March 2010, the Bank of Russia has purchased more foreign currency than it has sold. Given the large amount of foreign currency in the foreign exchange reserves (USD 461.7 billion as of November 2013), market interventions are not likely to result in significant reserves depletion. The interventions have even less impact on the total value of official reserve assets, which amounted to USD 515.6 billion in November 2013. Nonetheless, such depreciation pressure on an emerging market currency warrants close monitoring given Russia's current weak external economic fundamentals and risks of global capital movement back to developed markets. By Alexander Dembitski - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
9th January 2014 Foreign Currency Interventions Grow as the Ruble Depreciates