‘Trap’ of Stronger Ruble a Risk to Nabiullina Without Safeguards

  • Central bank governor warns on repeating ‘mistake’ decade ago
  • Finance Ministry wants to re-introduce budget rule in Russia

Russia can’t afford to repeat its “mistake” a decade ago when it allowed higher oil prices to lift the ruble’s value, according to central bank Governor Elvira Nabiullina.

“We shouldn’t fall into the same trap,” Nabiullina said on Wednesday in Moscow at a forum organized by VTB Capital. “There needs to be a fiscal rule that among other things helps contain the appreciation of the ruble’s real exchange rate. And that means that fiscal policy should reduce the dependence of revenue and spending on volatile oil income.”

A mechanism that the Finance Ministry wants to re-introduce would prevent the government from spending surplus revenue above a pre-set oil price and insulate the economy from the ups and downs in crude. Finance Minister Anton Siluanov, who’s also counting on the so-called budget rule to help keep the exchange rate in check, has said that the price of oil for the policy should be set at $40 a barrel, with the extra cash to be transferred into one of Russia’s two wealth funds.

“After a period of adaptation for the budget,” estimated to take three years, “the budget rule needs to be instituted, with some elements possibly introduced even earlier,” Nabiullina said.

The government scrapped the previous budget rule for 2016 because applying it would have forced it to draft this year’s budget based on an average oil price above $80 a barrel.

Lost Gains

Russia has been squandering the advantages of a weaker exchange rate after the central bank’s shift to a free float in late 2014 and the crash in oil prices, which has left the currency at the whim of swings in crude. Without central bank interventions to smooth the ruble’s fluctuations, the link between the currency of the world’s biggest energy exporter and a barrel of crude reached a record earlier in 2016 before declining.

The ruble, the best performer among emerging markets over the past month, was 0.2 percent stronger against the dollar as of 2:57 p.m. in Moscow on Wednesday. The 60-day correlation between the Russian currency and oil this week climbed to the highest in a month.

While the central bank won’t abandon its free-float policy, any interventions it could carry out would only affect the nominal exchange rate, which would offer no advantage for Russian products, according to Nabiullina.

“Competitiveness depends on the real rate,” she said.