Russia: Ruble drops to five-year low against U.S. dollar
February 10, 2014
The ruble (RUB) dropped to a five-year low against the U.S. dollar (USD) on 3 February amid an escalating selloff of emerging market currencies. It traded at just 35.5 RUB per USD, which was the lowest level that has been recorded since the first months of 2009 - the height of the financial crisis in Russia. The reading marked a 6.8% deterioration over the quote recorded on the same day of the previous month and a 18.7% deterioration on an annual basis. On the same day, the RUB traded at 41.1 against a reference USD-EUR currency basket that the Central Bank uses as reference for its exchange rate policy; this marked the lowest level on record.
In subsequent days, the ruble recovered some ground as the Bank sold large amounts of dollars to prop up the value of the currency. The ruble has been on a nearly uninterrupted trend of depreciation since the beginning of 2013. The selloff in emerging market currencies that began in the beginning of 2014 is causing an acceleration in the trend.
The Bank has not expressed concern regarding the deterioration of the ruble. The Bank manages the value of the ruble so that it doesn't drift above or below a 7.0 RUB-wide trading band in order to avoid extreme volatility of the currency. It buys or sells foreign currency according to pre-set levels as long as the value of the ruble moves within the trading band. The Bank's level of intervention has no limit when the currency exceeds the upper limit of the range - as it has done in recent weeks. That said, the Bank shifts the trading band by 5 kopecks (100ths of a ruble) each time interventions reach USD 350 billion, thus adjusting to the weakening of the currency.
By January 2015, however, the Bank aims to adopt a full free float of the ruble. To this end, it announced on 14 January that it would stop its so-called "target interventions", which are daily sales (or purchases) of foreign currency. The Bank had used this tool to offset the impact of imbalances in the current account depending on changes in the price of oil.
Russia appears to be in a better position to withstand a deterioration of the currency compared to the other emerging economies that are affected by the global sell-off. Russia does not depend on external financing because it runs a current account surplus. In addition, international foreign exchange reserves ended 2013 at USD 509.6 billion; despite the fact that the reading represents a deterioration compared to the USD 537.6 recorded in 2012, this is still sizable firepower with which the Bank can prop up the currency. That said, a lower ruble may fuel inflationary pressures, thus making it more difficult for the Bank to cut interest rates and support the ailing economy.
Against this backdrop, FocusEconomics Consensus Forecast panelists expect the ruble to trade at 34.1 RUB per USD by the end of 2014. For 2015, panelists expect the ruble to end the year at 34.7 RUB per USD.
Author: Armando Ciccarelli, Head of Data Solutions