The Russian Economy is Unprepared to the Regime of a Fully Flexible Exchange Rate
On January 23, 2014, the Central Bank of Russia set the USD/RUR exchange rate at the level of Rb 33.87 for a US dollar and that of the Euro/RUR exchange rate at the level of Rb 45.91 for a euro. The above exchange rate values make up the cost of the bi-currency basket at Rb 39.29 which is the maximum value from March 2009. From the beginning of the year, the cost of the basket grew by more than a ruble (from Rb 38.24 as of January 1, 2014) or 2.75%.
In 2013, there were five mini-depreciations, that is, periods when the cost of the bi-currency basket within a month increased by over 2.5%. Totally, in the past year the ruble depreciated by nearly 10% against the bi-currency basket.
From June 2013, the Central Bank of Russia has made intervention on the currency market virtually every day by selling up to $200m a day. As a result, in 2013 the volume of currency sales by the Central Bank of Russia exceeded $28bn, while from the beginning of 2014, over $2bn. It is to be noted that from 2015 the Central Bank of Russia plans to withdraw completely from the currency market by letting sellers and buyers of the currency to determine themselves the cost of the Russian ruble.
The regime of fully flexible exchange rate formation leads to volatility of the exchange rate and increases currency risks in the short-term prospect. In addition to the above, the current market situation on the global commodity and financial markets determines the mid-term downward trend of the ruble. There is an opinion that the Central Bank of Russia started to reduce prematurely the support of the national currency because the Russian economy is not yet prepared to the regime of the fully flexible exchange rate.
On the other side, free floating of the ruble will permit to avoid sharp fluctuation of the exchange rate and save the foreign exchange reserves of the Central Bank of Russia. So, in 2008-2009 over $200bn was sold out of the reserves and despite that within three months the ruble lost nearly 35% of its value against the bi-currency basket.
М.Yu. Khromov, Leading Expert of the Structural Research Center