Russia: rouble moves to full float
Published 14 November 2014
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This article is no longer current. Please refer to Overseas Business Risk – Russia
Summary
Comments from the Central Bank, ministers and Putin helped the rouble to rebound and stabilise on 10 November. But the risk of further depreciation in the coming months remains. The rouble is now a fully floating currency, which will help to protect Russia’s reserves.
Detail
This is a further report on reactions to the 5 November announcement by the Central Bank of Russia (CBR) of amendments to its foreign exchange policy, reducing its interventions in the FX market to a daily limit of $350 million.
The strength of the market reaction shocked both the CBR and analysts. In the 48 hours following the announcement, the rouble lost 10% of its value against the dollar. By the end of the week, the rouble was down 42% against the dollar since the start of the year. The CBR released a statement on Friday noting that recent “feverish demand” for foreign currency now presented “risks to financial stability”.
Morgan Stanley assessed that speculators were largely behind the pressure on the rouble. But there were also suggestions that the Russian public had begun to lose faith in its currency. VTB, Russia’s second largest state controlled bank, reported that “the key pressure on the rouble is most likely now primarily from households”. Media sources suggested that large queues formed at some banks on Friday, and there were reports that smaller branches ran out of dollars.
On Monday 10 November, President Putin spoke about the rouble’s slide while at the APEC Summit in China. He argued that recent falls were “caused by speculative attacks and will end soon”. He also expressed his full support for the CBR’s policies, and dismissed any claims that the government could interfere in them. Business daily Vedomosti suggested on 11 November that the President’s comments were a “perfect verbal intervention” in support of the currency.
At close on Monday 10 November, the rouble had gained 6% since Friday morning’s historic lows. On Monday afternoon, the CBR announced that it would cease its remaining support for the rouble. This means it is now a fully floating currency, and the CBR will only intervene in extreme circumstances. The CBR also announced that it would temporarily reduce the amount of rouble liquidity it offers to Russian corporates, as it suspected that some were using this to engage in speculative positions on the rouble.
Comment
A key advantage of a floating rouble is that it will also allow Russia to protect its reserves at times of currency turbulence: the CBR has used $80 billion in reserves since the start of the year trying to prop up the rouble.
Russia will be hoping that the rouble now enters a more stable period, although further oil price falls and renewed sanctions remain a significant downside risk.
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