The Central Bank suspends the barely begun purchases of foreign currency in reserves

The budget rule regarding the purchase of foreign currency in reserves when oil and gas additional income appears will work for only three days – on Wednesday, the Bank of Russia, which purchases yuan on behalf of the Ministry of Finance, announced the suspension of such purchases from August 10 until the end of the year. The obvious reason is the unwillingness to put additional pressure on the weakened ruble. The effect of the decision for the foreign exchange market will be rather psychological, but it will give time to think about a new correction of the budget rule – its current version is problematic.

“The Bank of Russia decided from August 10, 2023 until the end of 2023 not to purchase foreign currency on the domestic market as part of the mirroring of regular operations of the Russian Ministry of Finance related to the implementation of the budget rule. The decision was made in order to reduce the volatility of financial markets,”— announced Wednesday regulator.

This decision was fairly expected (see “Kommersant” dated August 4). Recall that last Thursday the Ministry of Finance reported on oil and gas revenues for July and seven months. For the second time this year (the first was in March), these revenues exceeded the baseline, that is, 8 trillion rubles broken down by months, which is the minimum necessary for the budget in 2023 to cover expenses from oil and gas. Since additional oil and gas revenues appeared in the budget in a single July, on the same day the Ministry of Finance announced a change in the direction of one of the two main budget rules, which consists in the fact that if the “base” is short, the department must sell currency and gold, and if it is exceeded, buy them in reserves from the market. The Ministry of Finance then announced that it would send 40.5 billion rubles through the Central Bank for the acquisition of these assets – 1.8 billion rubles each. per day from 7 August to 6 September.

But in fact, the rule in this part will work for only three days. The Central Bank on Wednesday explained that the decision to resume purchases will be made “taking into account the actual situation in the financial markets,” and deferred purchases can be made during 2024 and beyond.

It should be noted that in January 2022 and after the start of the military operation of the Russian Federation in Ukraine, the purchase of foreign currency in reserves was already suspended. As it turned out later, almost ten months. During 2022, most of the additional oil and gas revenues went to current expenses, and by the end of it, the government passed a law on new, softer budget rules through the State Duma. In a truncated form, they have been working since 2023 (in terms of replenishing reserves), in full (with the rules on setting a ceiling on expenses) they should come into force in 2025.

Although the Central Bank explains the refusal of purchases by concern for the ruble, the transition from the sale of yuan to the purchase announced by the Ministry of Finance on August 4 had a rather psychological impact on the market – after all, the volume of 1.8 billion rubles. insignificant against the background of the turnover of trading in yuan on the Moscow Exchange. For example, on August 8 they amounted to 101.9 billion rubles. In addition, in fact, the interventions of the Ministry of Finance should have been compensated by the actions of the Central Bank, which had previously announced that since August, in order to mirror operations related to investing funds from the National Welfare Fund (NWF) in the first half of 2023, it will start selling yuan in the amount of 2.3 billion rub. per day and will do so until the end of January 2024.

Thus, as a result of the efforts of the two regulators, the market should see a net sale of currency by only 0.5 billion rubles. in a day. On Wednesday, the Central Bank clarified that its operations for 2.3 billion rubles. it will continue to carry out as planned.

Note that the actions of the Central Bank will not be limited to what is happening. So, on Wednesday, a presidential decree was signed on the possibility of executing currency state guarantees in rubles – this is a longer-term impact on the foreign exchange market. Recall that exchange rate formation is now taking place in conditions of capital restrictions, which greatly distorts its standard mechanisms: this is partly why the Central Bank speaks of “volatility” of the exchange rate, and not of the weakening itself. From the autumn of 2023, there will clearly be more factors for the strengthening of the ruble (it is not known, however, from what level it has been reached). Thus, in its report on monetary conditions, the Bank of Russia states that a partial recovery in oil export prices “has not yet had a significant impact” on the exchange rate – “probably”, time lags have increased, and this contributed to the weakening of even the real effective exchange rate of the ruble (REER) to the median of indicators since January 2015 (minus 11.4%). Recall that the weak balance of payments still remains positive, and at a considerable level. Finally, the peak of upward deviation of budget expenditures from the norm in the first half of the year has apparently already passed, and this is also an argument in favor of a somewhat stronger ruble in the future (however, it is incomparable with the huge country “military” risks).

One way or another, as a result, the monetary authorities, as it was before August, will continue to sell yuan (only now it will be done not by the Ministry of Finance, but by the Central Bank), and the financial department, if additional oil and gas revenues remain, will be able to direct them to current needs. On August 3, the Ministry of Finance itself announced this choice indirectly, announcing its intention to start spending less on the NWF to close the budget deficit.

Telegram channel analysts “Hard Numbers” fix that now “there are no working elements of the budget rule officially”.

Bloomberg Economics economist for Russia Alexander Isakov says that if additional income continues, in the next four months we are talking about removing the government’s “overhang of demand” for the currency in the amount of $ 7-9 billion (almost a third of the current account surplus in seven months), and this can strengthen the exchange rate by 2-3%. But most importantly, the economist notes, “the suspension gives the government five months to rethink the fiscal rule and return to the 2018 version, which does not have a “poison pill” that forces you to increase currency purchases when the exchange rate weakens, and not reduce the OFZ placement plan.” .

The suspension of the rule did not provide support for the ruble, following the results of the exchange environment, it again weakened a little more.

Vadim Visloguzov, Dmitry Butrin