Bank of Russia Defends Intervention With Dig at Wealth Fund Raid

Dmitry Tulin
Russian Central Bank First Deputy Governor Dmitry Tulin. Photographer: Bank of Russia via Bloomberg

The Bank of Russia mounted a defense of its interventions on the currency market, saying the government had more heavily influenced monetary policy by tapping the country’s sovereign wealth funds.

Operations by the government amount to a “more significant” factor, the Russian central bank’s head of monetary policy, First Deputy Governor Dmitry Tulin, said at a banking conference in St. Petersburg on Friday. The interventions, started in May to replenish international reserves, are compatible with a free-floating exchange rate, according to Tulin.

That’s because they “don’t result in uncontrolled changes in the volume of money supply and an uncontrolled impact on interest rates on the interbank money market,” he said. Policy makers are taking into account the government’s turning to wealth funds for spending increases, which is sending “generous money flows into the banking sector.”

The Bank of Russia, which moved to a free-float regime ahead of schedule last November amid a currency crisis, has faced questions over its plans to boost reserves to $500 billion and how that meshes with its policy of allowing market conditions to set the ruble’s exchange rate. Purchases of $3.1 billion helped turn this year’s best-performing currency into the worst in the past month, sending the ruble on Thursday to the weakest against the dollar in two months.

Unsealing Funds

The world’s biggest energy exporter, entering its first recession in six years, is using the Reserve Fund, one of the government’s two wealth funds, to cover the fiscal shortfall after oil prices plunged.

Russia will use 3 trillion rubles ($54 billion) from the Reserve Fund this year, including 500 billion rubles already taken to finance current spending, Finance Minister Anton Siluanov said May 14. The fund’s holdings fell to $76.3 billion in May from $76.4 billion the previous month, according to the Finance Ministry.

Prime Minister Dmitry Medvedev also ordered the government last month to study the possibility of using the $75.9 billion National Wellbeing Fund to cover the pension fund’s deficit in 2016-2018. Russia is already planning to use the stockpile, originally created to cover long-term outlays for social spending, to finance infrastructure.

Rebuilding Reserves

The central bank’s push to rebuild its reserves involves buying between $100 million and $200 million daily. The effort doesn’t amount to support for the ruble, Governor Elvira Nabiullina said in St. Petersburg Thursday. In determining the size of the interventions, the bank sought to limit their impact on the currency market and the ruble, according to Nabiullina.

Purchases can be halted depending on the market situation, Bank of Russia First Deputy Governor Ksenia Yudaeva said on Friday.

The ruble, the world’s best-performing currency against the dollar this year with an 8.6 percent gain, traded 1 percent stronger at 55.8840 to the greenback as of 1:05 p.m. in Moscow.

The ruble’s three-month implied volatility, a gauge of exchange-rate swings, was 23.5 percent, the highest globally, according to data compiled by Bloomberg.

“What’s happening in the financial markets is unprecedented,” said Tulin, pointing to stocks, commodities and the dollar’s exchange rate against the euro. “The instability is horrific in the whole world, and it’s a challenge for us.”

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