The Central Bank decided to “cut the cat’s tail piece by piece”, trying to support the ruble

The Central Bank next week will almost ten times increase the daily volume of currency sales to keep the ruble from further weakening. But even this measure is unlikely to have a tangible effect: the exchange rate of the ruble against the dollar is determined primarily by the state of the economy, which means that it cannot be corrected for a long time by purely monetary methods. No matter how promising they may seem.

According to the Bank of Russia, “to pay off the foreign currency issue of Eurobonds”, it will sell foreign currency for 150 billion rubles from September 14 to September 22 – at 21.4 billion per day instead of the previous 2.3.

The market rate of the ruble reacted to this announcement at the moment, slightly strengthening to 97.4 per dollar and up to 104.5 per euro. But a few hours later, it weakened again to 97.9 and 105.2, respectively. As they say, to “economically justified” values.

According to the current version of the fiscal rule mechanism, the Central Bank, as an agent of the Ministry of Finance, buys or sells yuan (formerly dollars and euros) on the open market, depending on the amount of additional or lost oil and gas revenues. In August, the regulator stopped buying yuan until the end of the year due to the growth of these revenues to stabilize the ruble, which at its peak fell below 100 per dollar.

Earlier, in July, the Central Bank launched the sale of yuan, regardless of commodity income. According to this scheme (different from the one mentioned above), every six months it will determine the amount of yuan to be sold, depending on how much the state has invested during this period in rubles from the NWF. It is within the framework of this scheme that the Central Bank is now increasing its presence in the foreign exchange market.

Meanwhile, despite all the regulatory efforts it is making in tandem with the Ministry of Finance, the ruble continues to live its own life, categorically refusing to strengthen. Why do the monetary authorities limit themselves to half-measures, “cutting off the cat’s tail piece by piece”, why, say, they don’t return the rule for the mandatory sale of exporters’ foreign exchange earnings (as was done in the spring of 2022)? Today, these questions naturally arise in many.

“The Central Bank’s temporary acceleration of currency sales is due to the need to smooth out possible fluctuations in the ruble exchange rate in anticipation of the repayment of external debt,” explains BitRiver financial analyst Vladislav Antonov. – On September 16, the term of circulation of Russian Eurobonds for $3 billion expires. Payments to investors will be made in rubles, which may increase demand for the currency on their part. The measure planned by the regulator is purely technical, situational, and in the long run will have little effect on the ruble exchange rate.”

As for the answer to the question why the Central Bank and the Ministry of Finance are acting too cautiously in the foreign exchange market, preferring small tactical steps and refraining from sharp turns in their monetary policy, there may be several reasons for this, Antonov argues.

First, the financial authorities do not want to tighten currency restrictions (including on the export of capital), fearing to provoke panic among the population. Despite the “toxicity” of the dollar and the euro, citizens will probably rush to buy foreign currency and transfer funds to accounts in foreign banks.

Second, regulators seek to preserve Russia’s image as an open economy on the world stage. Third, they count on further increases in oil prices and increased export earnings, which will reduce the budget deficit and reduce the imbalance between the supply and demand of the currency without additional measures. Fourth, an excessive strengthening of control is fraught with the growth of shadow schemes for the flight of capital, including among exporters.

“The Central Bank stubbornly uses the term “volatility”, which is clearly not suitable for assessing what is happening, although, perhaps, it seems to the regulator more beautiful,” says Mikhail Belyaev, candidate of economic sciences. – Volatility is sweeping fluctuations in the exchange rate, and we are seeing its steady weakening. The increase in daily volumes of currency sales announced by the Central Bank may have a short-term effect: the ruble will strengthen slightly for a short time, but the depreciation trend itself will continue.”

To draw parallels between the tough actions of the Central Bank in March last year and the soft current ones, the expert believes is not entirely correct.

“The collapse of the ruble and the rush demand for dollars and euros among citizens in March 2022 were due to external sanctions shocks, and not deep-seated problems in the Russian economy, which then felt quite good,” the analyst says. According to Belyaev, last year these symptoms of mild malaise could be removed with purely regulatory “poultices”, which eventually happened.

But today’s weakness of the ruble has a completely different nature – domestic economic crisis. The rate cannot be strengthened without using macroeconomic levers: without reducing budget expenditures, without increasing exports, without reducing the outflow of capital abroad (its rate is estimated at $3-4 billion per month), without weakening the tax regime and lending rates for businesses.

Apparently, for the time being, the authorities consider it premature to take all these unpopular measures.