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The Bank of Russia FX policy

Bank of Russia exchange rate policy

  • A floating exchange rate regime is currently underway in Russia. This means that the ruble exchange rate is not fixed and there are no targets set either for the exchange rate level or its fluctuations. The ruble exchange rate is determined by supply and demand in the FX market. The exchange rate flexibility helps Russian economy adjust to changing external conditions by mitigating their impact.

    Under normal conditions, the Bank of Russia does not intervene to influence the ruble exchange rate. At the same time, the regulator closely monitors developments in the FX market and may resort to foreign exchange operations to maintain financial stability.

Floating exchange rate regime

At present, Russia employs a floating exchange rate regime, which means that the ruble exchange rate against foreign currencies is set by the market, i.e. the ratio between the demand for foreign currency and its supply in the FX market. Any factors disturbing this ratio initiate exchange rate fluctuations. In particular, exchange rate dynamics may be influenced by changes in export and import prices, inflation levels and interest rates in Russia and other states, economic growth rates, investors’ sentiment and expectations in Russia and world-wide, changes in monetary policies pursued by central banks in Russia and other countries. (Data on the ruble exchange rate dynamics and its underlying factors are presented in the quarterly Monetary Policy Report).

Thus, the ruble exchange rate is not set by the government or the central bank, it is not fixed, nor there are any targets set for its level or rates of change. Normally, the Bank of Russia does not conduct FX interventions to influence the ruble dynamics. This is by what the floating exchange rate regime differs from numerous variations of the managed exchange rate regime.

According to Article 34.1 of the Federal Law ‘On the Central Bank of the Russian Federation (Bank of Russia)’, the principal objective of the Bank of Russia’s monetary policy shall be to protect and ensure stability of the ruble by way of maintaining price stability. Stability of the national currency shall mean ensuring the ruble’s purchasing power on the basis of a stable and low inflation, rather than its fixed rate against other currencies. Under low inflation, the quantities of goods and services purchased for the same amount in rubles shall largely stay unchanged over a long period of time. This supports the confidence of households and businesses in the national currency and creates favourable environment for the economic growth in Russia.

Floating exchange rate is an important component of the inflation targeting regime, which implies that the ensuring of price stability shall be the main objective of the central bank. The Bank of Russia switched to the floating exchange rate regime in November 2014. Prior to this transition, for many years the Bank of Russia had gradually increased exchange rate flexibility and had consistently reduced its interference in the domestic FX market. The transition to the floating exchange rate regime was a phased-out process in order to facilitate market participants’ adaptation to exchange rate fluctuations driven by the more flexible exchange rate.

For more detailed account of the Bank of Russia’s exchange rate policy please click here.

Reasons behind the Bank of Russia’s transition to the floating exchange rate regime

The floating exchange rate functions as an ‘automatic stabiliser’ for the economy, which is its main advantage compared with the managed exchanged rate. It facilitates the economy’s adaptation to changes in external conditions by mitigating the impact of external factors.

For example, growing oil prices make the ruble appreciate, which lowers the risks of economy overheating; whereas, falling oil prices weaken the ruble, thereby supporting domestic producers through expanding exports and stimulating import substitution.

Another example of the floating exchange rate operation as an ‘automatic stabiliser’ is its effect on cross-border capital flows. In case of a fixed or managed exchange rate any changes in interest rates made by other countries and ensuing changes in the difference between internal and external interest rates may trigger the inflow or outflow of speculative capital. Under the floating exchange rate regime, market participants-driven increase in the demand for or the supply of foreign currency as a result of changes in the difference between internal and external interest rates leads to respective exchange rate movements rendering speculative operations unprofitable.

By increasing the economy’s dependence on external environment, the fixed or managed exchange rate also makes the monetary policy dependent on other countries’ policies and external economic situation. Under the managed exchange rate regime, in response to changing external conditions the central bank is forced to intervene to influence the domestic currency, thus adversely affecting other economic parameters, including inflation rate.

The floating exchange rate allows the Bank of Russia to conduct an independent monetary policy aimed at resolving domestic objectives, and primarily – at reducing inflation.

At present, most developed countries pursue the floating exchange rate regime.

Bank of Russia in the FX market

The introduction of the floating exchange rate regime means that the Bank of Russia has abandoned the practice of regular FX interventions to influence the ruble exchange rate. This regime assumes that in normal conditions the central bank does not intervene in the market processes, thus letting the ruble exchange rate act as the ‘automatic stabiliser’.

However, the Bank of Russia is set to closely monitor the situation in the FX market remaining prepared for foreign exchange operations (including on a reverse basis) in order to maintain financial stability.

As the threat to financial stability, the Bank of Russia views the exchange rate dynamics that may form sustainable depreciation expectations, enhanced demand for FX cash, growth in deposit dollarisation and a considerable deterioration in the financial stability among credit institutions and businesses.

The Bank of Russia may also conduct operations in the FX market to replenish international reserves. Sizeable international reserves enable the Bank of Russia to maintain financial stability and ensure the uninterrupted external debt servicing during several years even under an unfavourable economic situation.

Replenishment of international reserves shall be conducted in small amounts so that not to impact the ruble exchange rate. When making decisions on foreign currency purchases the Bank of Russia takes into account the ruble dynamics and the situation in the Russian economy and the balance of payments.

For detailed information on Bank of Russia operations in the FX market please click here.

Information disclosure on exchange rate policy

Information on the Bank of Russia’s exchange rate policy and factors influencing the ruble exchange rate over various periods of time is provided in Monetary Policy Reports, Guidelines for the Single State Monetary Policy, Bank of Russia Annual Reports (section Publications). Besides, each exchange rate policy decision is followed by a press release in the sub-section Press releases on monetary policy of the section Monetary policy. The sub-section The Bank of Russia FX policy of the section Monetary policy also contains frequently asked questions regarding the Bank of Russia FX policy issues.

Detailed information on Bank of Russia operations in the FX market is published in the section Monetary Policy; data on the volumes of operations and parameters of the Bank of Russia exchange rate policy are published in the sub-section Foreign Exchange Interventions of the section Statistics / Monetary policy instruments of the Bank of Russia and banking sector liquidity indicators.

Statistical information on the FX market is published in the sub-section Financial markets of the section Statistics. Answers to frequently asked questions on the procedure of setting the ruble’s official exchange rates against foreign currencies are given in the sub-section Foreign currency market (in russian only).

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 December 17, 2015.