Amid currency gyrations, Russia floats ruble
After a head-spinning drop in the Russian ruble this year that has raised echoes of the brutal market crises of the 1990s, the national central bank on Monday decided to freely float the currency and shield it more from speculators.
The move, which aims to spare the central bank from burning billions in reserves on supporting the currency, highlights the extent of Russia's economic decline.
Buffeted by Western sanctions and a big drop in the price of its oil exports, the country is sliding toward recession. Investors are pulling money out or seeking the safety of foreign currencies.
For ordinary Russians, the currency's plunge has fuelled fears of a spike in inflation, as imports of goods like European cars or US clothes become more expensive.
Whereas the central bank previously was trying to keep the ruble from dropping by simply buying the currency in the market, that strategy has hit a wall.
The bank has spent some US$110 billion of its US$510 billion since the start of the year - and still the ruble has dropped by a third in the period. It spent US$30 billion last month alone.
After the currency hit another record low of over 48 to the dollar on Friday, the central bank said Monday it would stop intervening every day in the market to keep the currency up and instead take aim at speculators.
To do that, it said it will limit loans to banks that use the money to go out and buy dollars. Central Bank Chief Elvira Nabiullina also said it will intervene "at any moment in the amount necessary to counter speculative demand".
Investors welcomed the move, as it will spare the country's reserves and should help limit speculative trades against the ruble.
The currency strengthened on Monday's news, trading up 2.3 per cent at 45.6 rubles a dollar in late trading.
Though the ruble rose on Monday, analysts say the free float could in fact see it decline over the longer term. Western sanctions over the fighting by Russia-backed separatists in eastern Ukraine are unlikely to be lifted anytime soon.
"The problem is we still have this big shadow of east Ukraine; the threat of sanctions is hanging over the whole economy and the currency," said Chris Weafer, an analyst at Macro Advisory in Moscow.
The ruble is also expected to come under more pressure next year, when Russian companies and banks will have to pay back about US$100 billion in hard currency debts, Weafer added.
The central bank had originally planned to allow the ruble to trade freely next year in what it had hoped would be a sign of its economic prowess. Instead, the move was made out of a desperate need to stanch spending of the national reserves.
Speaking in Beijing, where he attended the Asia-Pacific Economic Cooperation summit, Russian President Vladimir Putin voiced confidence that the central bank's move will help stabilise the ruble. In a bid to assuage investors, he also vowed that the government will not impose any capital controls.
"We have seen speculative fluctuations of the rate, but I think it will end soon in the face of action taken by the central bank in response to action by speculators," Putin said.
Besides spending money to buy rubles in the market, the central bank has also sought to stabilise its currency by steadily raising its base interest rate from 5.5 per cent to 9.5 per cent last month.
The higher borrowing rates have not helped the ruble much, however, and are in fact likely to weigh further on the economy by making credit more expensive.
In a nod to the challenges ahead, the central bank on Monday revised its estimates for how much money investors will pull out of Russia this year, from US$90 billion to US$128 billion. It predicted zero economic growth next year.