In a surprising development, the Russian central bank has disclosed its intention to resume interventions in the domestic foreign exchange market starting January 2024. This decision, aimed at stabilizing the rouble, follows a temporary halt in purchasing foreign currency implemented in August to curb the currency’s depreciation, which had seen it fall below 100 to the dollar.
The central bank’s revised approach includes a unique formula for interventions. It factors in the variance between foreign exchange purchases deferred from August 10 to December 31 and the National Wealth Fund’s (NWF) spending on financing the government’s budget deficit for 2023.
Analysts, including CentroCreditBank economist Yevgeny Suvorov, find the news unexpected yet optimistic. Suvorov suggests that, come 2024, the central bank may not buy the deferred foreign currency but could increase its sales, a potential positive for the rouble.
Despite this significant announcement, the rouble exhibited minimal reaction on Monday, maintaining its position near a more than five-month high achieved the previous week.
Dmitry Polevoy, head of investment at Locko Invest, estimates deferred purchases at around 1.7-1.8 billion roubles ($19-$20.1 million) and forecasts NWF expenditures on financing the budget deficit at 3.46 billion roubles. Polevoy projects a net currency sales difference of 1.65-1.75 billion roubles.
The specific timeframe for the central bank’s interventions remains uncertain. Final calculations, set to be disclosed in late December, will include variables such as the net volume of NWF investments in rouble financial assets and the volume of regular operations under Russia’s budget rule.
Russia’s budget rule stipulates selling foreign currency from the NWF to offset revenue shortfalls from oil and gas exports or making purchases in case of a surplus. This move follows the finance ministry’s switch from sales to purchases in August, contributing to increased pressure on the rouble. The central bank temporarily halted its mirroring of the finance ministry’s operations to mitigate rouble volatility. The finance ministry had resumed interventions in January after a hiatus of several months, opting for China’s yuan over what it deemed “unfriendly” Western currencies.
As more details emerge in the coming weeks, market observers will closely watch the central bank’s actions and their potential impact on the rouble’s trajectory, which has shown resilience amid recent economic challenges.
Photo (BY VISHWAROOP SHARMA)
By: Montel Kamau
Serrari Financial Analyst
27th November, 2023
