Recent Policy Developments in Russia

Russian Economy Minister Ulyukayev proposed a possible delay to the ruble free float from the current 2015 target. Remarks are noteworthy, as most officials have consistently said the float would come in 2015. He added that the ruble float should perhaps be tied to financial stability, suggesting Russia sees continued turmoil in EM this year.

Yesterday, the central bank of Russia (CBR) moved the operational corridor for the ruble basket upward by a larger than usual 15 kopecks to 33.65-40.65 as of January 28. Today, however, the bank went back to its usual 5 kopecks shift by raising the corridor to 33.70-40.70. Recall that the CBR changes the corridor when amount of cumulative intervention reaches $350 mln, and has already done this several times this month as the ruble remains under pressure. The basket is currently trading around 40.51 after trading as high as 40.65 on Monday.

Recall that under the current scheme, the CBR will sell $200 mln when it trades between 38.70-39.70 and then another $400 mln when it trades between 39.70-40.65. No intervention is required within the 35.60-38.70 range. The CBR has not specified what it will do when the basket trades above the upper bound (40.65 currently), as it makes is no direct reference to this issue in its communications. However, we would expect ongoing FX intervention above 40.65 at discretionary amounts that will likely depend on market conditions at that time. Central bank chief Nabiullina said that CBR spent $27.5 bln in 2013 to help limit ruble fluctuations.

Within the context of FX liberalization, Russia’s weak fundamentals are worth discussing. One stated aim of FX liberalization and a free float is to “contribute to strengthening the effectiveness of the interest rate policy conducted by the Bank of Russia for ensuring the price stability.” CPI inflation was 6.5% y/y in December, up from the trough of 6.1% in September and above the 5-6% target range. The economy is slowing, with growth decelerating in virtually every quarter since the cycle peak of 5.1% y/y in Q4 2011. The only exception was that Q3 2013 growth was steady from Q2 at 1.2% y/y, both the slowest quarters since Q4 2009.

Russia reported preliminary Q4 current account data that was worse than expected ($4.7 bln vs. $5 bln consensus). The four-quarter total fell to $33.8 bln from $41.9 bln in Q3, the lowest since Q4 2002. Russia also reported the private capital outflow data for Q4 at -$16.6 bln, extending the streak to 14 straight quarters of outflows. The four-quarter total current account in Q4 no longer covers the four-quarter total private capital outflows. Large-scale external surpluses were major supportive factors for RUB in the past, so it’s worth keeping an eye on the deteriorating trend.

Foreign reserves continue to erode as FX interventions continue, but remain relatively high. Reserves stood at $511.6 bln in December, but have continued falling in 2014 to $498.8 bln in the week ended January 17. External debt ratios remain very low and as long as oil prices remain fairly elevated, the Russian economy and the ruble should be able to avoid a wholesale collapse. However, we do think economic fundamentals are deteriorating and this should weigh on the ruble. The exchange rate will also be driven by wider EM sentiment, which we believe remains vulnerable to further negative swings. For USD/RUB, support seen near 34.50 and 34.00, while resistance seen near 35.00 and then 36.55.

BBH Global Currency Strategy Team