Minfin starts buying foreign currency to replenish the Reserve Fund

As a reminder, on March 4, 2014 the Federal Treasury suspended foreign exchange buying operations because of increased volatility in the internal foreign exchange market. March 4, 2014 is the date when the Russian foreign exchange market saw the most feverish demand for foreign exchange and Bank of Russia’s intraday foreign exchange selling exceeded $11,2bn.

The speculative attack on the Russian ruble was subdued substantially after the Bank of Russia decided on March 3, 2014 to switch to a daily quoting of the exchange rate according to the current market situation and increase the amount of accumulated interventions moving operating range limits by 5 kopeks, to $1,5bn.

Additionally, on March 3, 2014 the Central Bank of Russia lifted the key interest rate fr om 5.5% to 7% p.a.. The foregoing decision not only allowed the Bank of Russia to make the operating range limits less sensitive to the volume of completed currency interventions, but also show that it is ready to support the Russian ruble through deeper engagement in quoting the exchange rate. As a result, the demand for foreign exchange began to weaken, and Bank of Russia’s daily volume of foreign exchange sales stabilized at $200m as early as the end of March. Nonetheless, the Bank of Russia sold more than $22bn and 2bn euro in March 2014. January 2009 was the last time the Bank of Russia made major currency interventions, when the regulator sold more than $34bn and 4bn euro.

The situation in the Russian foreign exchange market remained relatively quiet as well in the first decade of April 2014, when regulator’s daily foreign exchange interventions varied within a range of $138 and $200m. Resuming Treasury’s foreign exchange transactions also reflects eased tensions in the Russian foreign exchange market as a result of certain stabilization of the political turmoil in Ukraine. 

Furthermore, it should be noted that the Ministry of Finance of Russia has formulated rules under which the volume of its FX operations will be adjusted to the dynamics of the dual-currency basket’s value within the range established by the Bank of Russia. For example, when the upper limit of the internal operating range is reached the Ministry of Finance of Russia will reduce the volume of foreign exchange purchase down to Rb 1,75bn daily, and foreign exchange operations will be entirely suspended when the upper limit of interval operation is reached.

The Ministry of Finance’s rules also envisage that buying foreign exchange for replenishing the Reserve Fund won’t be resumed unless the dual-currency basket’s value falls below the operating range limit and stays within the range within five trading days. FX operations will be resumed stepwise: at the initial stage the volume will amount to Rb 1,75bn daily. A daily volume of operations of Rb 3,5bn won’t be increased unless the dual currency basket’s value drops below the upper lim it of the internal range and stays within the range within three trading days. In our opinion, adjusting Treasury’s volumes of operations to parameters and dynamics of the dual-currency basket’s value will release pressure upon the foreign exchange market.

Pavel Trunin, Ph.D. in Economics, Head of Gaidar Institute’s Monetary Policy Department,

AnnaKiyutsevskaya, seniorresearcher