Russia’s central bank widened the ruble’s trading band, signaling the conflict in Ukraine won’t derail plans to float the currency at the turn of the year.
Policy makers increased the band to 9 rubles from 7 rubles and abandoned interventions within the range, Bank of Russia said in a statement today. The ruble strengthened 0.2 percent to 41.5706 against the bank’s target basket of dollars and euros by 7:28 p.m. in Moscow, paring its 2014 decline against the greenback to 8.9 percent, the worst performance among emerging-market currencies after Argentine’s peso.
The changes are intended to prepare for the shift to a freely-floating ruble, which the central bank says is necessary to put interest rates in the focus of its policy, rather than currency interventions. The monetary authority, bucking a trend toward more state control in the Russian economy, made the move after increasing its benchmark rate by 2.5 percent since the country’s incursion into Crimea in March as capital flight accelerated, even as the economy nears recession.
“Given the context of overall government policy, it’s interesting that the central bank seems so far to stick to its independence and stick to its mandate,” Liza Ermolenko, an emerging-markets economist at Capital Economics in London, said by phone today. “There is a possibility that if things get much worse again that the ruble will fall sharply and the bank may have to change its exchange-rate policy once again.”
The central bank hasn’t intervened to keep the ruble in its targeted range since May, after spending $44 billion on preventing the currency from sharper depreciation earlier in the year. The world’s biggest energy exporter had $469 billion of foreign exchange and gold reserves as of Aug. 8.
The ruble’s 30-day historic volatility dropped 14 percent over the past 3 weeks, according to data compiled by Bloomberg. The swings are still the biggest among 24 leading emerging markets after the Indonesian rupiah and Turkish lira.
“The decision is well-timed,” Natalia Orlova, the chief economist at Alfa Bank in Moscow, said by phone. “The ruble is stable now and the regulator can widen the corridor. This is a signal for the market to look more to the interest rate” than the ruble to gauge policy.
The three-month non-deliverable forwards for the ruble rose 0.1 percent to 36.8719 per dollar today. Implied volatility climbed to 11.14 percent from 10.89 percent on Aug. 15, according to three-month options data compiled by Bloomberg. The gauge reached a three-month high of 11.32 percent on Aug. 8.
While the state’s role in the economy has been increasing under President Vladimir Putin in a reversal of the country’s trajectory since the fall of communism, central bank Governor Elvira Nabiullina is intent on loosening controls on the currency’s flexibility and prioritizing the fight against inflation. The central bank has kept a tight grip on the ruble since a default on local-currency debt in 1998.
The free float would mark the final step away from the tight currency control during Soviet times, when authorities used multiple exchange rates -- among others for citizens and for accounting trade with allies. While the central bank stopped active currency management after the collapse of the Soviet Union, capital controls remained in place until 2006, when the ruble became fully convertible.
The move was spearheaded by Nabiullina’s predecessor, Sergey Ignatiev, who also set the plan toward a free float and inflation targeting in motion.
“For all practical purposes, the ruble has already been a free-floating currency of late,” VTB Capital analysts Maxim Korovin and Anton Nikitin said in an e-mailed note. “During periods of excess stress, the central bank would still be making interventions in some form or other, we expect.”
The decision “will not have a significant impact on current ruble fluctuations” since the currency is trading within the band, the Bank of Russia said. It has managed the ruble since 1999, the year after the government defaulted on $40 billion of domestic debt, by buying or selling reserves to curb its gains or declines.
The central bank has already been showing its autonomy by withstanding calls from politicians to help stimulate the flagging economy with lower borrowing costs.
“The central bank is quite independent in Russia, they are sticking to their plan” of moving to a free float, Roland Gabert, a money manager at DWS Investment GmbH, a company with $1.3 trillion in assets under management, said by phone from Frankfurt. “Even with the volatility, it’s not preventing them from changing the plan. It’s another step in the right direction.”
Providing support for the currency, policy makers surprised with a 50 basis-point rate increase last month, bringing the benchmark to 8 percent. They seek to temper inflation that exceeded 7 percent in the four months through July, above the 5 percent central bank target. The 2015 goal is 4.5 percent.
Capital outflows peaked at $48.8 billion in the first quarter, the largest since $132.1 billion was pulled out of the country in the last three months of 2008 after the collapse of Lehman Brothers Holdings Inc. and a conflict with Georgia.
The new trading band is 35.40 to 44.40 rubles against the target basket and the exchange rate is currently 6.5 percent from the upper boundary. The central bank previously bought and sold $200 million per day when the ruble breached certain levels within the targeted range.
Russia’s currency, which weakened in 2013 as the Federal Reserve signaled it would start winding down monetary stimulus, came under pressure this year as Putin’s standoff with the U.S. and its allies triggered a selloff in the nation’s assets. Sanctions are threatening the Russian economy with the worst performance since a recession in 2009.
“The central bank would rather allow faster depreciation, if conditions so dictate, than erode reserves trying to intervene,” Tatha Ghose, a London-based analyst at Commerzbank AG, said in an e-mailed report. It seeks to “put a higher value on the country’s foreign-exchange reserves,” he said.
The ruble is now “essentially free to weaken” to as much as 39.70 per dollar, Leonid Ignatyev, an analyst at BCS in Moscow, said by phone today. The central bank would probably increase rates again than sell dollars to support the dollar, should the ruble “rapidly” move to about 37.50, he said.
Under the new rules, the regulator plans to make quicker adjustments to the ruble corridor by decreasing the amount of interventions needed to shift it up or down by 5 kopeks to $350 million from $1 billion previously. The regulator can buy or sell unlimited amounts of currency as soon as the ruble moves outside the range, it said in the statement.