The Central Bank will not abandon the ruble

By Vestnik Kavkaza

From the beginning of the year, the ruble has fallen against dollar and euro, but experts continue considering the Russian currency reliable. The ruble is supported by strong gold and foreign currency reserves, high interest rates, the level of direct foreign investments, problems in the USA and the EU, and high oil prices.

Dmitry Piskulov, the chairman of the Board of the National Currency Organization, recalls that in 1990-2000s the Central Bank encouraged the policy of the de-dollarization of the economy. It led to the fact that the population keeps its money in rubles. “However, the situation of a weakening ruble made a part of the population transfer savings into foreign currency. So, the confidence seems to be disturbed, even though the majority of people put trust in the ruble, and there is no panic, unlike in 1998. The Russian economy is strong; we have a lot of goods and a saturated market. We have economic growth, even though it’s not big. We have low inflation. And in general people trust in the ruble. Moreover, they earn money in rubles and spend it in rubles,” Piskulov said.

Speaking about prospects of the exchange rate, the expert noted: “From the beginning of the year the ruble fell by 7%. In 2008 the Central Bank undertook consent devaluation at the level of 30%. In 1998 devaluation was 400%. If we look at the point from which the falling started, May 2013, we will see that the ruble fell by 18%. In general it is beneficial for the economy. On the other hand, the population expects the worst from the fall of the ruble, as well as many players on the market, including foreign hedge funds. The Central Bank held interventions which corrected the ruble rate. However, after a certain stabilization of ruble, a second wave of ruble weakening may take place.”

Piskulov believes that we may see 37-38 rubles per dollar. However, I believe that at the end of the year the level will return to 34.5-35.5 rubles per dollar; the devaluation will be at a level of 8-10%; it is not big and beneficial for economy.”

The expert recalls that the Central Bank adheres to the principle of transition to a free rate of floating currency by 2015, which implies the gradual phasing out of foreign exchange intervention on the market and the elimination of the currency corridor. In 2014 it will support the currency corridor and foreign exchange intervention. “Over the last year the Central Bank has raised the limits of the corridor about 32 times. These actions, in addition to fundamental factors, have provoked great demand for foreign currency among the population, enterprises and economic agents, they have also provoked demand for currency among international investors, who took a short stance on the ruble, and a long stance on the dollar or the euro, which harms the ruble. All these developments have resulted in the accelerated depreciation of the domestic currency. A refusal to target exchange rates, i.e. to retain a certain defined value of the exchange rate, as well as the transition to inflation targeting and interest rate management, because interest rates are more important for the economy than exchange rates, takes place,” Piskulov believes.

He also thinks the Central Bank will step by step try to establish a free floating exchange rate, which is intrinsic to all developed currencies such as the dollar, the euro, the yen, the pound and so on. At the same time, the Central Bank will not maintain any particular threshold, it is not committed to a particular threshold. But this has to happen in 2015. But even after 2015 the Central Bank will not abandon the ruble. “We can expect the elimination of the currency corridor in 2015, the elimination of currency restrictions in the form of daily restrictions on foreign currency accumulation, but the Central Bank will reserve the right, if necessary, to intervene in foreign currency affairs to the extent that it deems necessary. In fact, the floating regime does not imply their elimination,” the expert says.

He suggests looking at the experience of Western countries: “In the 70s, 80s and even 90s central banks intensively intervened in the foreign exchange markets to support certain exchange rates or adjust some very pronounced changes when the dollar strengthened or, on the contrary, fell. However, in the 2000s, they almost stopped doing it and shifted towards credit-monetary policy, that is towards controlling interest rates. But at the same time, if for example we suddenly notice that some tendencies in the U.S. or EU economies are leading to sharp changes in the exchange rate of the euro against the dollar, we cannot exclude the possibility that the central banks of these countries might intervene to defend currencies. Elvira Nabibulina in fact, talked about the very fact that after the elimination of mechanisms behind exchange rate corrections, the Central Bank reserves the right to intervene if necessary. It is a rather optimistic statement, we like it, because it means that the government will not leave the ruble in the lurch and will not allow it to devalue as much as a dollar costing 70 to 100 rubles.”