Russia's central bank abolishes trading corridor, restricts liquidity, as ruble stabilises

By bne IntelliNews November 10, 2014

bne -


Russia's central bank has abolished the ruble trading corridor - effectively floating the currency -  while temporarily restricting ruble liquidity to impede further depreciation. 

Russia's central bank said that as of November 10 it had abolished the ruble trading corridor and would no long intervene to defend the ruble against the bi-currency dollar / euro basket. Central bank head Elvira Nabiullina told Russian TV that this is effectively a ruble free-float.

"Instead we will intervene on the currency market at any time and with a volume we judge necessary to stem panic-driven speculative demand," she said, as quoted by Interfax. The central bank will also intervene against any threat to macro-economic stability, she said.

In order to prop up the ruble, the central bank will also temporarily restrict banks' access to ruble liquidity, and thereby reduce speculative demand on the currency markets, Nabiullina said on TV. "It [ruble liquidity] is being used not only to supply credit to the economy, but also for games on the currency market," she said.

Nabiullina said the free float would help increase the effectiveness of the central bank's monetary policy, tackle inflation and increase the economy's ability to absorb shocks.

After weeks of falling, the ruble strengthened by over a ruble to the dollar in the morning of November 10 - before the central bank announcement - after the price of oil spiked, and Russian President Vladimir Putin said there were no fundamental reasons for further devaluation. The ruble remained steady at around RUB45.2 to the dollar after the central bank announced it was abolishing the trading corridor. 

The price of Brent crude rose for the third time in four days, to $83.63 per barrel, up 25 cents on closing, after China published better than expected export data on November 10.

Putin, speaking during a visit to China on November 9, told a press conference: "Currently we see speculative jumps in the exchange rate but this will stop soon, taking into account the actions that the central bank is undertaking in response to speculators." 

"What we are seeing on the currency market is absolutely not connected to fundamental economic reasons and factors. Everything will come into the appropriate equilibrium," Putin added. Putin said there were no plans for currency controls or turning back from introducing a ruble free float.

The ruble's bounce after weeks of falling in fact started late on November 7, after a warning from Russia's central bank that it would use large-scale intervention against speculators, and that it regarded the ruble price as nearing market equilibrium.

Abolishing the trading corridor now conserves central bank reserves and makes its threats that it could intervene massively against speculators more credible.

Russian authorities will hope that the ruble bounce on November 10 will discourage households from buying dollars, say analysts, after the first signs of Russians converting savings into dollars appeared last week. 

“This, with other signs of rising devaluation expectations, prompted the central bank to intervene verbally and threaten ad hoc interventions ... This is a welcome change in rhetoric, but we remain concerned that the market might want to test the regulator’s willingness to act,” wrote VTB Capital analysts in a research note.

According to VTB Capital,  the recent sharp drop in the ruble was prompted by “panic capital flight,” and not fundamentals. “We continue to believe that the ruble has overshot and once the dust settles it will gravitate towards a fair value (…) around 42-43 against the dollar.”

Other pundits are not convinced. “I would certainly contend that fundamentals are indeed driving rouble weakness,” wrote Standad Bank's Tim Ash. 

According to Ash, the ruble has been overvalued because oil prices are being artificially supported by the US anti-crisis policy of quantitative easing, which has also eroded growth, along with red tape and weak property rights. “The latter means that locals and foreigners don't want to invest in Russia in the real economy which is a huge long-run problem,” argues Ash.

Ash also believes that the central bank has its hands tied politically, having committed to a ruble free float, while not being able to hike interest rates for fear of crippling growth. “So really all the CBR has left is verbal intervention and direct intervention,” says Ash.

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