Russia allows full rouble flotation ahead of plan

Moscow: The Bank of Russia pressed ahead with fully floating the rouble on Monday, a move that helped the currency to stabilise on the foreign exchange market as the central bank showed its determination to deter investors from betting against it. The central bank abandoned the dual-currency trading band with which it had so far calculated the nominal exchange rate and ended a policy of daily foreign exchange interventions to prop up the rouble.

The decision, which came just days after the bank drastically limited its regular interventions, completes an early transition to a fully flexible exchange rate regime that had originally been planned for the end of the year. However, the central bank kept its commitment to make foreign exchange interventions in case it sees threats to financial stability.

Elvira Nabiullina, governor, also said the bank was temporarily restricting rouble liquidity because it was “not only used to finance the country’s economy but also to play on the foreign exchange market”.

The Bank of Russia’s decision came only days after the rouble had suffered its biggest weekly drop in 11 years, amid fears that Russia could face a self-fulfilling currency crisis. Earlier steps to raise interest rates by 150 basis points to 9.5 per cent and move partially towards a free float had failed to stop the rout. As of Monday night, the rouble had pared some of its earlier losses, gaining 2.3 per cent against the dollar.

The announcement of a free float was accompanied by concerted efforts by both politicians and officials to support the rouble via verbal intervention.

“We are currently seeing speculative jumps in the exchange rate, but I think that this should stop soon,” President Vladimir Putin told a business audience at the Asia Pacific Economic Co-operation (Apec) summit in Beijing, adding that he was confident the central bank’s response would work.

The rouble’s sharp drop was “absolutely not related to fundamental economic reasons” and “equilibrium will come soon”, he said.

Anton Siluanov, finance minister, later said he hoped the currency’s volatility would recede by the end of the year. Analysts said the Bank of Russia’s moves had strengthened its hand in deterring speculators, but added that risks of renewed downward pressure remained.

“[The measures] have introduced the two-way risk that the currency desperately needed. One by one, the [Bank of Russia] is shutting down the avenues of least resistance to speculation,” said Tom Levinson, chief currency strategist at Sberbank in Moscow.

But he added: “The re-intensifying crisis in Ukraine and a [Group of 20 leading nations] meeting at the end of this week may see [the rouble] back under pressure.”

On Monday the central bank also highlighted the growing pressures on the Russian economy owing to sinking oil prices and western sanctions. In a big revision of its three-year monetary policy guidelines, the central bank pushed out its medium-term inflation target of 4 per cent from 2016 to 2017, saying it would not try to achieve this objective at any cost.

The bank sharply adjusted its macroeconomic forecasts. It raised its forecast for capital outflows from $90 billion to $128 billion this year and said economic growth would be zero in 2014 and 0.1 per cent in 2015. It also said Russia’s foreign exchange reserves were expected to decrease to $422 billion this year, $415 billion next year and to under $400 billion in 2016.

— Financial Times