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The Bank of Russia FX policy

The History of the Bank of Russia FX policy in 1999 — 2010 years

Since 1999 the Bank of Russia implemented policy of managed floating exchange rate which contributed to smoothing the influence of changes in external conditions’ on Russian financial markets and the Russian economy as a whole.

The Bank of Russia was intended to gradually decrease its influence on the exchange rate dynamics and to create scope for the shift to a floating exchange rate regime, which is an essential prerequisite for conducting the independent monetary policy focused on ensuring the price stability by means of the interest rate policy measures (the inflation targeting regime).

In 2005, the Bank of Russia introduced a dual-currency basket (that consisted of the US dollar and the euro) as the operational indicator of its exchange rate policy. The Bank of Russia set the corridor for this operational indicator (the operational band) and implemented FX interventions (rouble/USD and rouble/euro conversion operations on Exchange as well as OTC market; until 2005 the Bank of Russia implemented only rouble/USD conversion operations) on its boundaries to limit excessive dual-currency basket value fluctuations. When shifting the operational band’s boundaries the Bank of Russia took into account the balance of payment dynamics and domestic FX market developments.

As the scale of external operations of the Russian economy nominated in euro rose and the euro segment of domestic FX market expanded the weight of euro in the dual-currency basket was gradually increasing. In February 2007 the composition of the dual-currency basket was fixed at 0.55 US dollar and 0.45 euro. Using the operational band the Bank of Russia smoothed rouble exchange rate volatility vis-a-vis other major currencies while promoting more flexible exchange rate.

In the end of 2008 — beginning of 2009, the Russian economy faced external shock of a large scale induced by sharp changes of the situation on global financial and commodities markets. In this situation the Bank of Russia modified its exchange rate policy framework (see also the Bank of Russia Annual Report 2008 and 2009). In February 2009, the Bank of Russia set the rule for automatic shift of the operational band related to the accumulated amount of the Bank of Russia’s FX interventions and fixed the width of this floating band at 2 rouble. Since then the width of the floating operational band was gradually increased to ensure shift to a more flexible exchange rate.

In October 2010, The Bank of Russia announced that the fixed band for the rouble value of the dual-currency basket was abandoned. The fixed upper and lower boundaries set at the levels of 41 and 26 rouble respectively were effective from the 23 January 2009.

Current mechanism of the Bank of Russia FX policy implementation

The Bank of Russia conducts FX policy under managed floating exchange rate regime. This implies that the Bank of Russia does not prevent market trends in dynamics of the rouble exchange rate, which are induced by macroeconomic fundamentals, meanwhile smoothing excess volatility of the rouble exchange rate in order to ensure gradual adaptation of economic agents to exchange rate fluctuations. Any fixed constraints for the level of the rouble exchange rate or any target levels are not set.

The Bank of Russia uses the rouble value of the dual-currency basket consisting of 45 eurocents and 55 cents as the operational indicator for FX policy implementation. The floating operational band, boundaries of which are automatically adjusted depending on the amount of FX interventions, forms the range of admitted values for dual-currency basket. From 24 July 2012 to 17 August 2014 the width of the band was set at the level of 7 roubles. On 18 August 2014 the Bank of Russia symmetrically widened the operational band to 9 rubles.

Current mechanism for smoothing exchange rate volatility allows implementing purchases or sales of FX currency not only on the boundaries of the band, but also inside the band. The parameters of the Bank of Russia FX operations on domestic market are determined by taking into account the goal of smoothing exchange rate volatility and, effective from 1 October 2013, also given the Federal Treasury operations related to accumulation or expenditure of Reserve fund and National wellbeing fund.

In order to smoothen the volatility of the rouble exchange rate the dual-currency floating operational band is divided into internal ranges. The particular volume of FX interventions (in million USD per day) is determined for each range. At the same time the central part of the floating operational band includes the “neutral” range, where the Bank of Russia does not conduct interventions aimed at smoothing the volatility of the rouble exchange rate. The closer the value of the dual-currency basket to the lower (upper) bound of the floating operational band the larger the amounts of the Bank of Russia FX purchases (sales) of the foreign currency, aimed at smoothing the volatility of the rouble exchange rate. The volumes of the Bank of Russia operations, aimed at smoothing the volatility of the rouble exchange rate, are set symmetric relatively to the “neutral” range.

The information on the above mentioned parameters of the Bank of Russia FX policy implementation as of the 30 September 2013 is provided on Figure 1.

On 1 October 2013 the Bank of Russia informed that it is prepared for the implementation of the new algorithm for accumulation (expenditure) of sovereign funds in foreign currencies by the Federal Treasury.

As a result the amounts of the Bank of Russia FX operations on domestic market aimed at smoothing the rouble exchange rate volatility may be increased or decreased by the amount equal to the Federal Treasury FX purchases (sales) with the Bank of Russia related to accumulation (expenditure) of sovereign funds in foreign currencies. Such a correction of the FX policy mechanism allows to transfer the demand for or supply of foreign currency to domestic FX market and is presumed to be one of the steps in creating conditions for transition towards flexible exchange rate regime. This modification also allows softening the influence of the Federal Treasury operations, related to accumulation or expenditure of sovereign funds in foreign currencies, on the banking sector liquidity.

If the Federal Treasury takes decision on conducting FX purchases (sales) with the Bank of Russia, the net amounts of the Bank of Russia operations inside the internal ranges of the floating operational band become asymmetric.

In order to split the internal ranges of the floating operational band, in which are or may be implemented the operations of buying and selling foreign currency, the Bank of Russia introduced an additional “technical” range within the floating operational band. Inside the “technical” range the Bank of Russia does not implement any FX interventions, including those related to the Federal Treasury operations. The location of the “technical” range within operational band may change depending on the direction and volumes of the operations, related to the sovereign funds accumulation (expenditure). Effective from 1 October 2013 the width of the “technical” range is set at the amount of 0.1 rouble.

Effective from 1 October 2013 the parameters of the Bank of Russia FX policy mechanism were set as presented on Figure 2:

The parameters of the Bank of Russia FX policy implementation, modified according to the Bank of Russia decision from 7 October 2013 on making the “neutral” range 3.1 roubles wide (including the “technical” range), are presented on Figure 3.

Effective from 22 May 2014 the Bank of Russia decreased FX intervention volumes in the internal ranges of the floating operational band by $100 million to smooth the volatility of the rouble exchange rate. Effective from 17 June 2014 these volumes were again decreased by $100 million. Effective from 18 August 2014 the Bank of Russia set FX intervention volumes aimed at smoothing the volatility of the rouble exchange rate equal to $0 in the internal ranges of the floating operational band.

The adjustment of the of the dual-currency floating operational band is realized automatically as soon as the cumulative volume of FX interventions reaches the predetermined level. Between 10 December 2013 and 2 March 2014 the parameters for the shift of the floating operational band were set as follows: when the cumulative volume of the Bank of Russia FX purchases (sales) reached $350 million the boundaries shifted automatically down (up) by 5 kopecks. Starting 3 March 2014, given the increased volatility in the domestic FX market, the cumulative volume of FX interventions of the Bank of Russia was increased to the level of $1,500 million to limit rouble exchange rate fluctuations. Starting 17 June 2014, this value was decreased to the level of $1,000 million. Effective from 18 August 2014 the cumulative volume of the Bank of Russia FX interventions was decreased to the prior level of $350 million.

At the same time the amount of target interventions, which is used for managing flexibility of the floating operational band, is not included in the calculation of the aforementioned cumulative volume. This parameter does not affect the volume of the FX operations implemented by the Bank of Russia, it is applied only for calculating the volume of the interventions, accumulated for the shift of the band. If the net volume of the Bank of Russia FX operations, aimed at smoothing the volatility of the rouble exchange rate, exceeds the target interventions level during a day, the difference between these amounts is accumulated for the subsequent shift of the floating operational band boundaries during the trading day or in further days, when the set cumulative threshold will be reached. In the context of the ongoing transition to the floating exchange rate by 2015 Bank of Russia has step-by-step cut the amount of target FX interventions. Effective from 13 January 2014 the mentioned amount equals $0 per day.

An example of the automatic shift of the boundaries of the floating operational band is presented on Figure 4.

Until 5 November 2014, as the ruble value of the dual-currency basket reached the upper/lower border of the floating operational band, the Bank of Russia carried out unlimited foreign currency sell/buy operations. From 5 to 7 November 2014, as the ruble value of the dual-currency basket reached the upper/lower border of the floating operational band, the Bank of Russia carried out foreign currency sell/buy operations with the intensity equal to $350 million per day. Meanwhile, the automatic rule of operational band borders adjustment remained valid.

From 10 November 2014, the Bank of Russia abolished the exchange rate policy mechanism through cancelling the permissible range of the dual-currency basket ruble values (operational band) and regular interventions on and outside the borders of this band. However, the new approach of the Bank of Russia to operations in the domestic market does not provide for complete abandonment of foreign exchange interventions, which can be implemented in case of financial stability threats.

The information on the implementation of Bank of Russia FX policy is published in the Bank of Russia Annual Reports, the Single State Monetary Policy Guidelines and the Monetary Policy Reports, information on the adjustments of the mechanism of the Bank of Russia FX policy implementation and its parameters — in the section “Press releases on monetary policy”.

Data on the dynamics of the borders of the floating operational band, on the parameters of the Bank of Russia operations in the domestic FX market acting until 7 November 2014 and on the amounts transacted, on the dual-currency structure are published in the “Statistics” section (Table 1).

Table 1. Statistics on the Bank of Russia FX policy implementation

Information Link
Data on the Bank of Russia currency interventions Statistics. Monetary policy instruments of the Bank of Russia. Foreign Exchange Interventions
Data on the Bank of Russia currency interventions (monthly) Statistics. Monetary policy instruments of the Bank of Russia. Foreign Exchange Interventions
Data on the dynamics of the boundaries of the Bank of Russia floating operational band and the parameters of the operations in the domestic FX market Statistics. Monetary policy instruments of the Bank of Russia. Foreign Exchange Interventions
Current dual-currency basket structure Statistics. Monetary policy instruments of the Bank of Russia. Foreign Exchange Interventions
Updated November 13, 2014.