MOSCOW – In a decisive move, Russia’s central bank announced on Wednesday its intention to halt foreign currency purchases to mitigate the financial market pressures resulting from the ruble’s decline past 110 against the U.S. dollar, which has plummeted by one-third since early August. The bank will refrain from buying foreign currency on the domestic market starting November 28 until the end of the year, with plans to defer these purchases until 2025.
The regulator emphasized that this decision aims to reduce market volatility. Following the sanctions that blocked Russia from utilizing the U.S. dollar and the euro, the country has been conducting foreign exchange interventions with the Chinese yuan.
Recent economic data released by Russia reveals signs of an overheating economy, partly due to the ongoing conflict in Ukraine, which has drained the workforce. Real wages increased by 8.4% in September compared to the previous year, while unemployment dropped to a historic low of 2.3% in October, despite the benchmark interest rate being set at a staggering 21%.
As of 1600 GMT on Wednesday, the ruble had depreciated by 7.25% since the start of the trading day, trading at 113.15 to the dollar, which further exacerbates inflation currently standing at approximately 8% annually. The ruble also fell below 15 to the yuan, marking its lowest point since March 2022, shortly after the onset of the Ukraine invasion.
According to Russia’s budget regulations, the finance ministry utilizes foreign currency from its National Wealth Fund to compensate for revenue shortfalls from oil and gas exports or to make purchases during surplus periods. The central bank carries out foreign exchange transactions for the ministry while also managing its interventions.
The bank revealed it would maintain its own yuan sales at a rate equivalent to 8.4 billion rubles daily, effectively doubling the state’s net daily sales of foreign currency.
Dmitry Pyanov, deputy CEO of VTB, Russia’s second-largest bank, attributed the ruble’s steep decline to U.S. sanctions on Gazprombank, which has ceased to facilitate foreign currency transactions on the Moscow Exchange.
He urged the central bank to stabilize the currency market, which is currently experiencing dysfunction. Analysts at PSB Bank indicated that while the recent decision may offer some moderate support to the ruble, it likely won’t be sufficient to restore the exchange rate to previous levels, predicting ongoing market volatility.
The ruble’s decline has also been accompanied by a drop of over 20% in the stock market this year, as investors shift their assets from stocks to deposits that provide returns above the benchmark interest rate. Economy Minister Maxim Reshetnikov pointed to the global strength of the dollar and market concerns following sanctions as the primary causes of the ruble’s volatility, rather than fundamental economic factors, and anticipated stabilization soon.
He noted that a significant majority of Russia’s exports and imports are conducted in rubles and currencies from non-western countries. While some analysts suggest increasing mandatory foreign currency sales by exporters as a potential solution, skepticism remains regarding its effectiveness, especially given the challenges posed by sanctions.
The continued depreciation of the ruble is contributing to rising inflation, now projected to exceed the central bank’s estimates for the year, complicating the regulator’s monetary tightening efforts, which have seen the interest rate rise to its highest level since 2003. The central bank estimates a 10% devaluation of the ruble could add 0.5 percentage points to inflation, implying that the recent declines may contribute an additional 1.5 percentage points.
Following the imposition of sanctions, all trade in dollars and euros has transitioned to the over-the-counter market, leading to increased volatility and a lack of transparency, with banks primarily sharing data only with regulators.
(Reporting by Gleb Bryanski and Alex Marrow; Editing by Ros Russell and Gareth Jones)
