BoR FX Liquidity Operations

Operations to provide foreign currency are special purpose instruments employed by the Bank of Russia to ensure and sustain stability of the domestic FX market and the financial sector as a whole amid unfavourable external economic factors.

In the second half of 2014, restricted access of Russian companies and banks to foreign financial markets together with oil price drop resulted in increased volatility on the domestic FX market, higher devaluation expectations and deviation of the ruble exchange rate from the fair value. This posed considerable risks to price and financial stability.

In these circumstances, the Bank of Russia employs instruments to provide foreign currency on a repayable basis in order to expand credit institutions’ possibilities to manage their FX liquidity and support foreign debt redemptions of Russian exporters.

Ultimately, these instruments are used to ensure stable functioning of the domestic financial market and normal conditions for monetary policy implementation.

Due to the strong interdependencies between different financial market segments, tension in the FX market may impact short-term money market rates. As a result, money market rates can deviate significantly and sustainably from the Bank of Russia key rate which determines the monetary policy stance, and hamper the achievement of the Bank of Russia operational target and distort the functioning of the monetary policy transmission mechanism.

Bank of Russia operations to provide foreign currency on a repayable basis are not aimed at ensuring or sustaining certain ruble exchange rate and do not contradict the floating exchange rate regime. Many central banks following the floating exchange rate regime conduct such operations.

Moreover, as reverse transactions, they do not impact international reserve adequacy in the medium term resulting only in their short-term contraction of reserves.

The Bank of Russia provides foreign currency only to the banking sector, as with all the other instruments.

Main instruments to provide foreign currency on a repayable basis are auctions. The Bank of Russia holds these operations as FX repo auctions and auctions to provide FX loans secured by a pledge of claims on FX loans.

The Bank of Russia determines the maximum allotment based on the estimated demand of the banking and non-financial sectors for foreign currency considering the forecast of the main balance of payments components, including the assumed external debt repayments, estimated balance of FX assets and liabilities of the banking sector, including the its maturities. The Bank of Russia also considers financial stability goals and developments in the interbank FX lending market, including FX and FX interest rate swaps.

Foreign currency provision through repo auctions and credit auctions does not impact the level of ruble liquidity of the banking sector.

The Bank of Russia also determines the aggregate debt ceiling of credit institutions on FX repos and FX loans secured by a pledge of claims on FX loans. Currently, the ceiling is set at $50 billion in US dollars but it can be increased, if necessary.

The Bank of Russia links the minimum interest rates on auction-based operations to provide foreign currency to indicative rates in respective currencies for comparable terms. The Bank of Russia determines market rate spreads for each specific instrument (Interest rates on the Bank of Russia FX operations) taking account of the situation in the domestic FX market. Meanwhile, the interest rate at which banks receive funds is determined by the auction results.

FX repos are secured by securities other than shares included in the Bank of Russia Lombard List.

Bank of Russia FX loans are secured by a pledge of claims on FX loans extended to large Russian exporters. Besides, the currency of the Bank of Russia loan should coincide with the currency of the pledge. This allows expanding FX liquidity provision without increasing the burden on the marketable collateral used in standard monetary policy operations.

The list of Bank of Russia counterparties on FX loans secured by a pledge of claims of FX loans includes credit institutions whose capital amounts to at least 100 billion rubles as of 1 December 2014.

Standing facilities to provide foreign currency on a repayable basis were introduced to ensure uninterrupted settlements on FX transactions and prevent abrupt price fluctuations in the FX swap market in case of a short-term increase in market participant’s demand for foreign currency.

The Bank of Russia conducts these operations as overnight USD/RUB sell/buy FX swaps. They are conducted on terms of today/tomorrow and tomorrow/spot settlements.

Like in case of standing facilities to manage ruble liquidity of the banking sector, USD/RUB sell/buy FX swaps are initiated by banks and can be employed daily. At the same time, these operations are not supposed to be regular, as the Bank of Russia usually meets the demand of the banking sector for foreign currency through auction-based operations. FX swaps to provide foreign currency are required if certain banks have short-term imbalances which cannot be smoothed over by market operations.

Every day the Bank of Russia sets the limits for FX swaps conducted on terms of today/tomorrow and tomorrow/spot settlements (Terms of USD/RUB sell/buy FX swaps).

Interest rates on overnight USD/RUB sell/buy FX swaps are fixed. Besides, interest rate on the ruble leg of these transactions is linked to the Bank of Russia key rate (Interest rates on the Bank of Russia FX operations).

Operations to provide foreign currency are special purpose instruments and they are supposed to be abandoned gradually as economic agents adjust to the new external conditions in order not to discourage development of market mechanisms. Meanwhile, operations to provide foreign currency on a repayable basis will remain among Bank of Russia instruments and can be used again, if necessary.

For details of parameters and employment of certain Bank of Russia instruments to provide foreign currency refer to the following materials on the Bank of Russia website: