Exchange rate regime of the Bank of Russia
Russia is using a floating exchange rate regime, which implies that the exchange rate of the ruble is not fixed and that there are no pre-established targets for its exchange rate or the pace of its movements. The dynamics of the exchange rate of the ruble are determined by the ratio of the demand for and supply of foreign currency in the foreign exchange market. A flexible exchange rate helps Russia to adjust to changing external conditions, smoothing out the impact of external factors on the economy.
In normal conditions, the Bank of Russia does not conduct any foreign exchange interventions to influence the exchange rate of the ruble. That said, the Bank of Russia is keeping a close eye on the situation in the foreign exchange market and may carry out foreign currency operations in order to support financial stability.
Floating exchange rate regime
Russia is currently using a floating exchange rate regime, which means that foreign exchange rates against the ruble are determined by market forces, that is, the ratio of the demand for and supply of foreign currency in the foreign exchange market. Any factors affecting this ratio may cause the exchange rate to fluctuate. Specifically, exchange rate dynamics may be affected by movements of import and export prices, inflation and interest rates in Russia and abroad, the pace of economic growth, investor sentiment and expectations in Russia and abroad, as well as changes in the monetary policy of the central banks of Russia or other countries. (Data on fluctuations of the ruble exchange rate and factors causing these changes are published in the quarterly Monetary Policy Report).
Thus, the exchange rate of the ruble is not determined by the government or the central bank, it is not fixed, and there are no pre-established targets for the exchange rate or the pace of its movements. In normal conditions, the Bank of Russia does not conduct any foreign exchange interventions to influence the exchange rate of the ruble. This is what distinguishes a floating exchange rate regime from the multiple varieties of managed exchange rate regimes.
Pursuant to Article 34.1 of the Federal Law ‘On the Central Bank of the Russian Federation (Bank of Russia)’, the main goal of the Bank of Russia’s monetary policy is to protect the ruble and ensure its strength through maintaining price stability. The stability of the national currency does not imply setting a fixed exchange rate against other currencies, but rather preserving the purchasing power of money as a result of sustainably low inflation. When inflation remains low, the volume of goods and services that may be purchased for the same amount in rubles changes only slightly over a long period of time. This supports the confidence of both households and businesses in the national currency and creates favourable conditions for the growth of the Russian economy.
A floating exchange rate is a critical component of an inflation targeting regime, where the primary goal of the central bank is to ensure price stability. The Bank of Russia implemented the floating exchange rate regime in November 2014. This switch was preceded by a long period during which the Bank of Russia had been gradually increasing the flexibility of the exchange rate, consistently reducing its presence in the domestic foreign exchange market. In addition, the switch to the floating exchange rate regime was progressive, which helped to moderate the process of market participants’ adjustment to exchange rate fluctuations amid the higher flexibility of the exchange rate.
Rationale for the switch to the floating exchange rate
A floating exchange rate functions as a ‘built-in stabiliser’ of the economy, which is its key advantage over a managed exchange rate. It helps the economy to adjust to changing external conditions, smoothing out the impact of external factors.
For instance, when oil prices grow, the ruble strengthens, which reduces risks of economic overheating, while declining oil prices entail depreciation of the ruble, which supports domestic manufacturers owing to increasing exports and the promotion of import substitution.
Another example of the effect of a floating exchange rate as a ‘built-in stabiliser’ is its impact on transborder capital flows. When the exchange rate is fixed or managed, alteration of interest rates by foreign states and, consequently, changes in the difference between internal and external interest rates may result in an increase in the inflow or outflow of speculative capital. Under a floating exchange rate regime, a rise in the demand for or supply of foreign currency from market participants as a result of changes in the difference between internal and external interest rates entails respective movements of the exchange rate, thus making speculative transactions unprofitable.
A fixed or managed exchange rate regime increases the dependency of the economy on external conditions. Therefore, it also makes monetary policy dependent on other countries’ policies and on the foreign economic environment. Under a managed exchange rate regime, the central bank must carry out operations in order to impact the exchange rate of the national currency when external conditions alter. In turn, these operations may also influence other economic indicators, including inflation, and moreover, in an undesirable manner.
A floating exchange rate enables the Bank of Russia to implement independent monetary policy aimed at addressing internal issues, and first of all at decreasing inflation.
Today, floating exchange rate regimes are applied by the majority of developed economies.
Role of the Bank of Russia in the foreign exchange market
The switch to the floating exchange rate regime means that the Bank of Russia abstains from regular foreign exchange interventions to influence the exchange rate of the ruble. The central bank’s policy under the floating exchange rate regime implies that in normal conditions the regulator does not intervene in market processes, letting the ruble exchange rate function as a ‘built-in stabiliser’.
Simultaneously, the Bank of Russia continues to keep a close eye on the situation in the foreign exchange market and may conduct foreign currency transactions (including on a reverse basis) so as to maintain financial stability.
The Bank of Russia sees as a threat to financial stability such movements of the exchange rate which may induce persistent devaluation expectations, increase demand for foreign currency cash and the dollarisation of deposits, and materially deteriorate the financial sustainability of credit institutions and businesses.
The Bank of Russia may carry out operations in the foreign exchange market to replenish international reserves. With a significant amount of international reserves, the Bank of Russia will be able to carry out operations aimed at supporting financial stability and the ongoing servicing of external debt over several years, even if the situation in the economy becomes challenging.
Operations for replenishing international reserves should be conducted in small amounts to avoid any influence on the exchange rate of the ruble. In making its decisions on purchasing foreign currency, the Bank of Russia takes into account movements of the exchange rate, the situation in the Russian economy, and the country’s balance of payments.
Communication of information on exchange rate policy
Information on the Bank of Russia’s exchange rate policy and factors influencing the exchange rate of the ruble is provided in the Monetary Policy Reports, the Monetary Policy Guidelines, and the Bank of Russia Annual Report. In addition, any decision on exchange rate policy is followed by a press release. The website also has the FAQ section with responses on this topic.
The website provides detailed information on operations of the Bank of Russia in the foreign exchange market, statistics on parameters and amounts of operations (Foreign currency purchases and sales, Foreign currency repo operations, and FX swap operations), statistics on the foreign exchange market, and answers to frequently asked questions on how the Bank of Russia sets official foreign exchange rates against the ruble.