Russia: Ruble strengthening prompts government's intervention in FX market
February 1, 2017
The ruble (RUB) is making the headlines at the outset of the year after ending 2016 as the second-best performer among emerging-market currencies. Only the Brazilian real performed better than the Russian currency, which closed 2016 at 3.25 BRL per USD—a gain of 17.8% compared to the end of 2015—while the Russian currency ended the year at 60.3 RUB per USD, strengthening 17.3% compared to the end of 2015. The two emerging-market currencies’ performance is all the more remarkable since the U.S. dollar has soared against most other currencies and is nearly approaching parity with the euro. That said, the ruble is still well below the levels it reached before Western sanctions were imposed on Russia in the wake of the Ukraine crisis.
In the first weeks of 2017, the ruble continued to make gains against the greenback, settling below 60 RUB per USD, supported by rising oil prices and optimism that the economy is finally emerging from a deep recession. The currency has received an extra boost from speculation that the new U.S. administration under Donald Trump could lift sanctions on Russia as part of a possible improvement in Russia-U.S. relations.
Since the Russian ruble has rallied to levels that had previously triggered interventions in the FX market by the Central Bank to weaken it, on 25 January, the Ministry of Finance officially announced that the Monetary Authority will start buying U.S. dollars on the open market as of 1 February. The government indicated that the size of the interventions will be equal to the revenues from oil and gas in excess of what is stipulated in this year’s budget. This means buying U.S. dollars when the price of Urals oil exceeds USD 40 per barrel, which is the assumption for the average price of oil stipulated in the 2017 budget. The exact amount will be calculated each month and published no later than 12:00 hours Moscow time.
The intervention in the forex market is not a surprise, given that the Russian authorities resort to these mechanisms when they see that sharp exchange fluctuations reflect external shocks. However, as Anatoliy A Shal, Senior Russia Economist at JP Morgan points out:
“As we expected, the suggested intervention mechanism will replicate the one from the proposed budget rules. The size of intervention will equal additional oil revenues from oil prices higher than $40/bbl (Urals). Estimating oil and gas tax revenues in dollar terms is fairly straightforward given the oil tax formulas are known. Yet one peculiarity of the approach suggested by the Finance Ministry is that the current USDRUB is part of the calculation. The additional oil revenue, and hence the intervention size, will be estimated in ruble terms via the following formula each month: Extra oil revenue in rubles = Oil revenue (Uralst-1 , USDRUBt-1 ) – Budgeted oil revenue ($40/bbl, 67.5).”
Author: Ricardo Aceves, Senior Economist