Frequently asked questions
Ruble exchange rate against a foreign currency means the value of one ruble in terms of this foreign currency (it is also possible to calculate ruble exchange rate against a group of currencies). Reverse quotation, i.e. foreign currency exchange rate against the ruble, that is the value of one unit of the foreign currency in ruble terms, is more common. The ruble depreciates when foreign currency exchange rate rises and appreciates when it goes down.
Foreign currency exchange rate against the ruble is determined by the relation between the demand for the foreign currency and its supply in the FX market. Exchange rate fluctuations may ensue from any factors impacting the foreign currency demand/supply ratio. Particularly, the exchange rate dynamics may be influenced by fluctuations in import and export prices, domestic and foreign inflation and interest rates, economic growth rates, potential periods of instability in Russia and abroad, changes in monetary policy of the Bank of Russia and foreign central banks, and expectations of businesses.
External factors play a significant part in shaping exchange rate dynamics especially in countries with considerable economic openness like Russia. E.g., global price growth for commodities accounting for the bulk of Russian exports (primarily oil prices) result in higher foreign currency income of exporters from foreign trade. It results in growing supply of foreign currency from exporters in the domestic market usually creating conditions for ruble appreciation. Everything else being equal, lower oil prices, on the contrary, provokes ruble depreciation.
Information on the ruble exchange rate dynamics and the affecting factors is provided quarterly in the Monetary Policy Report.
Bank of Russia objectives and functions are determined by Clause 2 of Article 75 of the Constitution of the Russian Federation and Articles 3 and 4 of the Federal law ‘On the Central Bank of the Russian Federation (Bank of Russia)’ (hereinafter, the Law). In line with Article 34.1 of the Law, the main objective of the Bank of Russia monetary policy is to protect and ensure ruble stability through maintaining price stability with a view to, inter alia, creating conditions for balanced and stable economic growth. As provided by Clause 1 of Article 4 of the Law, the Bank of Russia works out and conducts the single state monetary policy in collaboration with the Government of the Russian Federation. The official document ‘Guidelines for the Single State Monetary Policy’ is prepared by the Bank of Russia and considered by the State Duma on the annual basis in accordance with Article 45 of the Law (published on the Bank of Russia website in section Monetary Policy). This document covers the implementation of the single state monetary policy by the Bank of Russia and its prospects for the next three years, including the information on the exchange rate policy.
According to Article 34.1 of the Federal Law ‘On the Central Bank of the Russian Federation (Bank of Russia)’, the main objective of the Bank of Russia monetary policy is to protect and ensure ruble stability through maintaining price stability. Thus, ensuring stability of the national currency does not imply keeping its exchange rate against other currencies unchanged but is achieved by means of maintaining its purchasing power through ensuring low inflation rate. When the inflation is low, the amount of goods and services which can be purchased for a fixed amount of rubles does not change considerably during a long period bolstering confidence of businesses in the national currency and ultimately creating favourable conditions for Russian economic growth. When conducting monetary policy, the Bank of Russia considers the impact of the exchange rate dynamics on consumer price growth alongside with other factors.
In compliance with the ‘Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017’, monetary policy is aimed at inflation decrease to 4% in 2017 and its further maintenance close to this level.
Meanwhile, starting 10 November 2014, the Bank of Russia pursues its exchange rate policy within the framework of the floating exchange rate regime that implies that the ruble exchange rate is not fixed and there are no targets concerning the exchange rate or its rate of change. The ruble exchange rate dynamics is determined by the market factors, i.e. influenced by fluctuations in foreign currency supply and demand in the FX market. In normal conditions, the Bank of Russia does not come up with FX interventions to impact the ruble exchange rate dynamics. This enables the Bank of Russia to tackle the inflation more efficiently.
Meanwhile, the floating exchange rate regime does not assume complete abstention from FX interventions but they can be implemented in case of financial stability threats. E.g., such situation occurred in December 2014 when excessive ruble depreciation resulted in its considerable violation from the fundamental values, i.e. the levels determined by macroeconomic factors, primarily those impacting the balance of payments: export prices, interest rate differential, economic activity, and others. During that period, the Bank of Russia sold foreign currency on certain days.
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. Such practice is in line with floating exchange rate regime and is successfully applied in various countries.
The transition to the floating exchange rate is the most important stage of the Bank of Russia transition to inflation targeting (a regime where the main objective of the central bank is to ensure price stability). The floating exchange rate enables the Bank of Russia to conduct independent monetary policy aimed at solving internal issues, particularly, reducing inflation.
The managed exchange rate combined with unrestricted cross-border capital flows attaches monetary policy to the policy of other countries, lays it open to changes in external conditions, and makes speculative activities in the FX market more attractive. In this case fluctuations of the interest rate differential (difference between domestic and foreign interest rates) may result in higher speculative capital inflow or outflow and imported external monetary conditions. The floating exchange rate becomes an embedded stabiliser: higher foreign currency supply or demand from market participants due to the change in the interest rate differential results in corresponding exchange rate fluctuation making speculative operations unprofitable.
Besides, the conduct of the exchange rate policy within the managed floating exchange rate regime and especially fixed exchange rate makes it difficult for the central bank to steer interest rates irrespective of the external political situation. FX interventions of the central bank aimed at impacting the exchange rate of the national currency also impact banking sector liquidity. Sterilisation of influence of these operations on the money market may require the central bank to make considerable efforts up to introducing nonstandard measures and instruments (in case credit institutions are short of market collateral), and result in higher tension in different segments of financial market and increased volatility of short-term interest rates in the economy.
The floating exchange rate also makes it possible to decrease the sensitivity of the economy to external shocks through easing its adjustment to changes in external conditions. Appreciation of the national currency amid positive external impact (e.g., oil price growth) mitigates risks of economy overheating while its depreciation caused by negative impact (oil price fall) supports domestic producers due to the higher exports and import substitution encouragement. When the exchange rate is fixed the impact of external shocks on the economy is not smoothed.
Russian experience of 1998 and 2008 and crises in other countries demonstrate inefficiency of pegging the national currency to a foreign one. In the short run, it results in establishment and development of imbalances in the economy, while in the long term it is impossible due to the exhaustibility of FX reserves: in case of considerable negative external factors the attempt to save the national currency from depreciation exhausts FX reserves of the country and is followed by inevitable dramatic depreciation. Therefore, as the national financial system develops and becomes more robust transition to the floating exchange rate is advisable.
The Bank of Russia implements its exchange rate policy within the floating exchange rate regime without hampering ruble exchange rate trends conditioned by fundamental macroeconomic factors. The Bank of Russia does not set any targets or fixed restrictions of the national currency exchange rate and the rate of its change. The Bank of Russia may interfere in the situation in the domestic FX market through FX interventions only in exceptional cases when the exchange rate dynamics threatens financial stability. E.g., such situation occurred in December 2014 when excessive ruble depreciation resulted in its violation from the fundamental values, i.e. the levels determined by macroeconomic factors primarily those impacting the balance of payments: export prices, interest rate differential, economic activity, and others. During that period, the Bank of Russia sold foreign currency on certain days.
When considering whether it is possible and reasonable to spend reserve funds to support (appreciate) the ruble it should be taken into account that the amount of reserve assets should meet certain adequacy requirements, primarily in terms of import coverage and external debt servicing. Thus, the volume of international reserves that can be used to support ruble exchange rate is restricted. The short-term effect of the impact of interventions by the central bank on the exchange rate of the national currency in the FX market should also be considered, especially if fundamental macroeconomic factors have the opposite impact. Therefore, this policy would a priori be inefficient even in case of large volume of reserve assets.
The ruble exchange rate is determined by foreign currency supply and demand in the FX market. Any factors (not limited to global energy price dynamics) leading to changes in foreign currency demand/supply ratio may result in fluctuations in the ruble exchange rate (refer to the answer to question “What is ruble exchange rate and what factors determine its dynamics”?
During certain periods, factors provoking ruble depreciation may prevail despite of simultaneous impact of other factors contributing, everything else being equal, to its appreciation. Thus, in late 2013 — early 2014, the interest of international investors to assets of emerging markets, including Russian assets, fell significantly. It was caused by the decisions of the US Federal Reserve to decrease the volume of asset purchase under quantitative easing programme (resulting in slower growth in foreign currency supply), and the signs of slower economic growth in emerging markets (resulting in lower returns on financial investments in these countries). The impact of these factors on the sentiment of market participants and lower demand for ruble turned out to be more significant than persistently high oil prices at that period resulting in ruble depreciation alongside with depreciation of national currencies of other emerging markets. Political developments in Ukraine in 2014 had additional impact on the ruble exchange rate dynamics. Investors’ anxiety regarding the consequences of geopolitical conflict for the Russian economy resulted in higher capital outflow, further decrease in demand for ruble and its depreciation.
The Bank of Russia does not publish quantitative forecasts of the ruble exchange rate. At the same time, when taking monetary policy decisions the Bank of Russia considers factors which may influence foreign currency supply and demand in the market and result in changes in the ruble exchange rate.
The Bank of Russia does not set any targets or fixed restrictions of the ruble exchange rate and the rate of its change. The ruble exchange rate dynamics is determined by the market factors, i.e. influenced by fluctuations in foreign currency supply and demand (refer to the answers to questions “What are goals, objectives and mechanisms of the Bank of Russia exchange rate policy?” and “Why did the Bank of Russia shift to the floating ruble exchange rate?”).
Exchange rate can impact the economy through different channels.
First, the exchange rate directly impacts domestic prices through prices of imported goods. Meanwhile, ruble depreciation may encourage domestic production due to the shift of demand from more expensive imported goods and services to domestic ones (import substitution effect). The scope of this effect depends on the availability of domestic products capable of substituting the imports, availability of free production factors to expand the output, and sensitivity of demand for imported goods to fluctuations of their prices. At the same time, lower real income of economic agents due to the price increase caused by the rise in cost of imported goods can weaken the demand for both imported and domestic products.
Second, if imported goods are used for further processing, higher cost of imports may raise the price of final products. Higher prices for imported investment goods can have negative impact on corporate investment programmes.
Third, changes in the exchange rate may impact price competitiveness of domestic products in international markets. Thus, depreciation of the national currency increases their competitiveness creating prerequisites for higher exports.
Fourth, exchange rate dynamics impacts balance sheets of banks, households and businesses — their FX assets and liabilities are revaluated. The impact of depreciation of the national currency on financial aspects of activity of companies (increased debt burden, higher return on investments) depends on the currency structure of their assets and liabilities.
Fifth, changes in the exchange rate may impact sentiments and expectations: behaviour of financial market participants, inflation expectations, and propensity to save.
Changes in the exchange rate also impacts public finances. Thus, e.g., depreciation of the national currency may result in higher income from foreign economic activity, particularly, export customs duties for oil and gas, and higher revenues from VAT and excise tax for imported goods. At the same time, budget expenditures for external sovereign debt servicing may increase. As a result the size of budget deficit may change.
The final impact of the exchange rate dynamics on the economic development depends on the pattern of production and demand, sensitivity of exports and imports to exchange rate fluctuations, impact on price growth and, consequently, real income of economic agents.
The impact of the exchange rate shift on price dynamics in the national currency is determined by the so-called exchange rate pass-through effect. The character and the value of the exchange rate fluctuation pass-through effect on consumer prices are essential for the implementation of monetary policy. The interconnection between the exchange rate dynamics and the inflation is one of the key links of the monetary policy transmission mechanism.
The exchange rate shift impacts the price dynamics in the national currency through several channels: direct impact on prices of imported finished products, indirect impact through the change in prices for domestic goods due to the shift in prices for intermediate imported products (used for further processing); change in prices for domestic goods and services competing with imported ones.
The character and the extent of impact of the exchange rate dynamics on inflation are determined by a number of factors and may vary considerably in different market segments, e.g., in the food and non-food markets. The size of the pass-through effect may depend on the share of imports in the certain market, pricing specifics, particularly, those connected with the level of competition and demand sensitivity to price fluctuations. Besides, the fluctuation of the ruble exchange rate against national currencies of other countries may have different impact on the dynamics of goods prices. E.g., the effect of the ruble fluctuations against the US dollar may differ from that of its volatility against the euro or the Chinese renminbi.
The impact of the pass-through effect is distributed over time, i.e. at a certain period the prices are impacted by both the current exchange rate fluctuations and its dynamics over the previous periods.
Researches have established asymmetry of the pass-through effect. It means that domestic prices can react differently on exchange rate fluctuations of similar scale depending on whether the national currency appreciates or depreciates. The size of the pass-through effect is also established to be dependent on the inflation level: pass-through effect is usually lower in case of lower and more stable inflation level.
When implementing monetary policy and developing its medium-term guidelines the Bank of Russia analyses factors impacting inflation, including the pass-through effect (refer to the quarterly Monetary Policy Report where factors impacting consumer price dynamics are considered).
It is not quite apt to consider the benefits of certain exchange rate for the country. In Russia, businesses having various economic interests function simultaneously. E.g., exporters and importers of goods have opposite interests in terms of level and dynamics of the national currency exchange rate. Depreciation of the national currency, i.e. a decrease in its value against other currencies, enables an exporter to receive more rubles for the same amount of foreign currency. In order to gain previous revenue in the national currency and cover its costs, a manufacturer can sell its goods in the foreign market at lower price facilitating its exports. Meanwhile, imported goods become more expensive and the amount of the national currency required to purchase an item of imported goods increases if its price in the foreign currency remains unchanged. Particularly, imported investment goods become more expensive, that can have negative impact on economic growth. Appreciation of the national currency, i.e. an increase in its value against other currencies, everything else being equal, has the opposite influence on the country’s exports and imports.
The need to raise the ruble’s status and role in the international trade has long been discussed in Russia. Meanwhile, in the conditions of open market economy businesses, particularly, companies engaged in foreign economic activity, usually determine the settlement currency for their international transactions themselves. Parties of trade and financial deals choose the means of payment based on the estimates of relative profits and costs from suing certain currency; the key role is played by the maturity and efficiency of financial market of the currency issuer and its integration into the global financial system. Currently, for most Russia’s trading partners the US dollar and the euro meet these criteria to the fullest extent. The Government of the Russian Federation is entitled to set the share of ruble settlements in companies’ international settlements for a certain list of goods, works and services and the list of foreign states with residents of which foreign trade contracts can be concluded.
The existing legislation of the Russian Federation does not set any limits of ruble convertibility for either current (including foreign trade) or capital account transactions. Liberalisation of FX transaction regime was completed in 2007 (Federal law No.
The published information concerns the current exchange rate regime as well as the history of exchange rate policy. For details of the Bank of Russia exchange rate policy, domestic market FX operations, the ruble exchange rate dynamics and impacting factors during certain periods refer to Guidelines for the Single State Monetary Policy, Annual Reports, Monetary Policy Reports.