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Russia's Central Bank opts to control inflation, not to support ruble

Central Bank of Russia (CBR) has reduced its targeted interventions in the foreign currency market from $60 million a day to zero Monday, thus starting gradual transition to a floating ruble exchange rate to be enacted as soon as 2015. The ruble responded downwards: on Tuesday, the euro and bi-currency basket reached records since 2009.

The CBR has opted for control over inflation. From now on, it will announce an inflation target and try to keep to it, while sacrificing the ruble. Having cancelled targeted interventions, the CBR retained the right to non-targeted ones.

Experts' outlooks for the ruble's behavior this year vary: a number of factors may affect the ruble's position, though the oil price will remain the determining one.

The regulator's targeted interventions were intended to support the ruble given the macroeconomic forecast based on the balance of payments and oil price dynamics. Market players used this instrument to gain profit on ruble fluctuations but will not be able to use targeted interventions now.

Over last year, the CBR sold about $27 billion. According to the director of Sberbank's Center for Macroeconomic Research, Yulia Tseplyaeva, without these interventions the ruble's exchange rate would hardly have changed considerably but would have undergone sharper short-term fluctuations.

However, the dollar had changed from 30.5 to 32.7 rubles by year-end, while the euro had jumped from 39.8 to almost 45 rubles.

The CBR's decision to cut interventions in exchange rate formation mechanism at the year-start came as no surprise for the market. Total 'release' of the ruble from the CBR's control is scheduled for the end of 2014. Over the last three years, the CBR has been gradually pulling out the ends of the floating range and decreasing all kinds of interventions to focus on control over inflation in the future. In 2013, the real effective ruble exchange rate declined 2.7% against 5.3% growth in 2012.

"You cannot have your cake and eat it: maintaining a stable ruble and steady interest rates are two contradicting tasks," a deputy head of the CBR, Ksenia Yudaeva, said in an interview to the Rossiyskaya Gazeta daily. "We find it reasonable to focus on reducing inflation and inflation expectations. This should not be done overnight, or the economy will be totally destroyed - gradual reduction is exactly our target."

Many experts forecast continued ruble decline this year, without the CBR's support, since any noticeable economic growth and oil price increase are not in sight; the balance of payments is gradually shrinking, while the capital outflow is not to wane. Since the year-start, the national currency has already lost more than 30 kopeks versus the dollar and the euro. Not everybody, though, sees risks of the ruble's sharp weakening.

"The CBR's actions are aimed at shifting towards free exchange rate formation and inflation targeting," the Moskovsky Komsomolets daily quotes an analyst of the Investcafe independent analytical agency, Timur Nigmatullin. "Over the medium term these actions will have an adverse effect on the ruble exchange rate causing its increased volatility," the expert believes.

Rising inflation, capital outflow and overall weakness of the Russian economy will also make their contribution. But oil price will be of the overriding importance, explains the director of the Banking Institute of the Higher School of Economics (HSE), Vasily Solodkov.

"Given the current economic conditions in Russia, in particular, the oil price decline, the ruble's fall is to be expected yet at a slow pace. Here, again, everything depends on the oil price," the expert believes.

According to dean of the faculty of economics at the HSE, Oleg Zamulin, quoted in the Novye Izvestia daily, the CBR's decision will affect the ruble's volatility but will not entail a substantial dip. "Daily and weekly fluctuations will be stronger in year-on-year comparison," he believes. However, the expert agrees that the price for oil and other exported goods will remain the fundamental factor.

Zamulin approves of the CBR's actions: "In my opinion, this is the right decision in full compliance with monetary policies underway in most countries of the world."

FBK vice-president for audit, Alexei Terekhov, believes the ruble exchange rate will remain unchanged as the CBR is changing its approach to foreign exchange controls and supervision, with the state's focus now shifting towards capital outflow. "This means export revenues' supply in the domestic foreign currency market should increase, while the need to export capital abroad will, on the contrary, decline. The two mechanisms -- reduced interventions and tougher foreign exchange controls -- may become interconnected, which will ultimately stabilize the ruble exchange rate."

The CBR will not totally abandon the interventions, believes financial analyst Sergey Suverov: "When a risk of too sharp fluctuations arises, the megaregulator will most probably support the national currency".

By year-end, the expert believes, the ruble will have weakened by no more than 7-8%, that is about 3-4 rubles as compared to the current ruble exchange rate versus the major world currencies.

[Source: Itar Tass, Moscow, 15Jan14]

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