Russia: Central Bank announces less intervention as ruble regains stability and political tensions ease
May 21, 2014
Political tensions eased in May after Russia withdrew its troops from the Ukrainian border. However, the two rounds of sanctions imposed on Russia in March and April remain in force and the threat of stronger measures has already served to erode investor confidence and trigger a massive capital flight. In the first quarter of the year, capital outflows totaled USD 63.7 billion, which was the largest outflow since Q2 2011 and exceeded all outflows tallied in 2013.
However, as the risk of a military escalation of the conflict with Ukraine diminished, calm returned to the foreign exchange and capital markets and capital outflows fell to just USD 4.6 billion in April. The Central Bank expects that capital outflows will be between USD 85 and 90 billion this year. In the beginning of the year, the Bank had forecast outflows amounting to USD 20 billion for 2014, but the surge in capital outflows tallied in the first quarter prompted the Bank to update its projections. The new figure assumes a sharp reduction in capital outflows over the coming quarters. The Finance Ministry expects outflows to be around USD 90 billion this year as well, which is below the International Monetary Fund’s (IMF) projection of USD 100 billion.
The Governor of the Central Bank, Elvira Nabiullina, attributed the slowdown in outflows to the stability that the ruble regained in May. Moreover, the Central Bank moved to a less interventionist stance regarding the exchange rate. In a measure that took effect on 22 May, the Bank adjusted the parameters of the exchange rate policy mechanism to promote further exchange rate flexibility in order to move toward an inflation targeting regime. The Bank had made a commitment to purchase rubles worth USD 400 million when the exchange rate reached the upper bound of the intervention bands and to sell the same amount when it reached the lower bound. The Bank recently decided to reduce both intervention amounts to USD 300 million. According to Artem Arkhipov, Head of Macroeconomic Analysis and Research at UniCredit Research:
“The most important implication of this decision is increased volatility of the currency under “ordinary” conditions. In fact, if there is temporary demand for, or supply of, hard currency, the CBR’s responsibility in establishing the new market equilibrium has declined, and market forces now have more weight in this process.”
However, regarding the short term impact of the decision, the monetary authority stated that, “taking into account that the current value of the dual currency basket is in the neutral range of the floating operational band, this decision will not impact ruble fluctuations.” The ruble closed May at 34.92 RUB per USD, which was a 2.0% appreciation from the 35.63 RUB per USD at which it had closed April. Nevertheless, it was down 9.4% with respect to the same day of the previous year.