Russia Seen Sticking to 2015 Free Float Amid Ruble Flurry

Russia won’t speed up its plan to allow the ruble to trade freely next year, even as the central bank’s continued defense of the currency has cost almost $24 billion this month.

The Bank of Russia will shift to a free-floating currency and introduce a formal inflation targeting regime early next year, according to 21 of 28 economists surveyed by Bloomberg. Six said the monetary authority will delay the plan and one predicted it would make the move earlier.

The central bank led by Governor Elvira Nabiullina is managing the transition with monetary policy stretched by the fastest inflation since 2011, oil prices at a four-year low and an economy near recession amid sanctions imposed by the U.S. and its allies. The ruble is the world’s fourth-worst performing currency this year.

“The central bank probably would not go for the risk of lowering its predictability,” Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, said by e-mail. “Although a free-floating ruble would certainly let inflation rise for a short period, the new monetary policy regime would allow the central bank to focus more actively on inflation management.”

Ruble Gyrates

The ruble surged the most since at least 2003 against the dollar today, rebounding from a record low before a central bank meeting tomorrow that analysts predict will result in higher interest rates.

The Russian currency surged as much as 5.1 percent to 41.0005 per dollar, the biggest increase on record, according to Moscow Exchange data. It traded up 3.8 percent at 41.5700 as of 6:51 p.m. in Moscow. The currency has depreciated about 21 percent against the dollar this year.

Scrapping the trading band is a milestone for Nabiullina, who left her job as President Vladimir Putin’s aide to become central bank governor last year. It would also be the most significant change in currency policy since 2006, when the central bank made the ruble fully convertible and eased restrictions on investors.

“We are keeping our plan to switch to a free-floating ruble in 2015,” Ksenia Yudaeva, Nabiullina’s first deputy, said Oct. 24. “It’s still valid despite recent market conditions. We’ve taken many preparatory steps to move to it.” She declined to comment on the exact timing of the move.

The shift to inflation targeting, a regime used by central banks from Canada to Brazil under which monetary-policy decisions are governed by projections for consumer-price growth, has been on the Russian regulator’s agenda for a decade.

Russian Reserves

The 2008 collapse of Lehman Brothers Holdings Inc. pushed the central bank to spend foreign-currency and gold reserves to cushion the ruble’s fall. The monetary authority was forced to dip into the stockpile again as sanctions enacted over the crisis in Ukraine pushed the economy toward a recession and triggered the ruble’s decline.

There’s a 70 percent chance of a recession in the next 12 months, according to the median estimate of 27 economists in a separate survey. That’s the highest since Bloomberg started tracking the figure two years ago, up from 60 percent last month.

“The situation is fully comparable to October 2008,” said Tatiana Orlova, chief economist for Russia at the Royal Bank of Scotland Group Plc in London. “It’s a perfect storm for Russia -- the oil price is falling sharply, while Russian borrowers have already been isolated from external borrowing markets.”

Reserves, Outflows

Reserves, which peaked at $598 billion six years ago, have since plunged by $159 billion and are near the lowest level in four years. Capital outflows reached $85.2 billion in the nine months through September, the highest level since 2008, when the exodus reached $133.6 billion

While Putin said Russia won’t “mindlessly burn up” reserves to defend its currency, policy makers may still seek to manage the ruble, according to Dmitry Kharlampiev, head of research at Bank Otkritie in Moscow.

“Pressure on the devalued Russian ruble is still strong, so under current conditions a free float regime in a true sense can have an additional negative impact for the market.”

A weaker ruble may feed into inflation, the main concern for a majority of Russians. Consumer prices grew 8 percent from a year earlier in September, the fastest pace in three years and double the central bank’s medium-term target.

Three Increases

With inflation gathering speed, the central bank has raised its benchmark interest rate three times since March by 250 basis points to 8 percent, despite calls to ease monetary policy to boost an economy growing at the slowest pace since a 2009 contraction.

Policy makers will raise the rate to 8.5 percent tomorrow, according to 22 of 31 economists in a separate survey. Two analysts predict an increase to 9 percent, one each to 8.75 percent and 8.25 percent, while five forecast borrowing costs will remain unchanged.

The market response will help shape the central bank’s decision on the timing of the currency float, which may be presaged by the widening of the 9-ruble-wide corridor, according to Vladimir Miklashevsky, an economist at Danske Bank A/S in Helsinki.

The first quarter of next year is “natural timing for the move, but the market situation will have an impact on the decision,” Miklashevsky said. “A quickly falling ruble would postpone it. If we see the traditional seasonal strengthening of the ruble, the switch to the free float will be done.”

Before it's here, it's on the Bloomberg Terminal.