The History of the Bank of Russia FX policy
Bank of Russia Exchange Rate Policy in 1999-2010
Since 1999, the Bank of Russia implemented exchange rate policy under the managed floating exchange rate regime which allowed it to smooth the influence of changes in external conditions on Russian financial markets and the Russian economy as a whole.
The Bank of Russia intended to gradually decrease its influence on the exchange rate dynamics and to prepare for switching to a floating exchange rate regime essential for conducting the independent monetary policy focused on ensuring the price stability by means of the interest rate policy measures (the inflation targeting regime).
In 2005, the Bank of Russia introduced the US dollar and euro basket as the operational indicator of its exchange rate policy. The Bank of Russia set the corridor for this operational indicator (the operational band) and implemented FX interventions (ruble/US dollar and ruble/euro conversion operations on the exchange as well as OTC market; until 2005 the Bank of Russia implemented only ruble/US dollar conversion operations) on its borders to limit excessive dual-currency basket value fluctuations. When shifting the operational band’s borders the Bank of Russia took into account the balance of payments dynamics and domestic FX market developments.
As the scale of external operations of the Russian economy nominated in euros rose and the euro segment of domestic FX market expanded the weight of the euro in the dual-currency basket was gradually increasing. In February 2007, the composition of the dual-currency basket was fixed at 0.55 US dollars and 0.45 euros. Using the operational band the Bank of Russia smoothed the ruble exchange rate volatility vis-a-vis other major currencies while promoting more flexible exchange rate.
In late 2008 — early 2009, the Russian economy faced a large-scale external shock induced by sharp changes of the situation in global financial and commodity markets. Given the situation, the Bank of Russia modified its exchange rate policy framework (see also the Bank of Russia Annual Reports for 2008 and 2009). In February 2009, the Bank of Russia set the rule for automatic shift of the operational band related to the accumulated amount of the Bank of Russia’s FX interventions and fixed the width of this floating band at 2 rubles. Since then the width of the floating operational band was gradually increased to ensure shift to a more flexible exchange rate.
In October 2010, the Bank of Russia announced that the fixed band for the ruble value of the dual-currency basket was abandoned. The fixed upper and lower borders set at the levels of 41 and 26 rubles respectively had been effective from 23 January 2009.
Bank of Russia Exchange Rate Policy from October 2010 to 10 November 2014
From October 2010 to 10 November 2014, the Bank of Russia conducted exchange rate policy under the managed floating exchange rate regime. That implied that the Bank of Russia did not prevent market trends in the ruble exchange rate dynamics induced by macroeconomic fundamentals and smoothed excess volatility of the ruble exchange rate in order to ensure gradual adaptation of economic agents to exchange rate fluctuations. Any fixed constraints for the level of the ruble exchange rate or any target levels were not set.
The Bank of Russia used the ruble value of the dual-currency basket consisting of 0.45 euros and 0.55 US dollars as the operational indicator for exchange rate policy implementation. The floating operational band, whose borders were automatically adjusted depending on the amount of FX interventions, formed the range of admitted values for dual-currency basket. From 24 July 2012 to 17 August 2014, the width of the band was set at the level of 7 rubles. On 18 August 2014, the Bank of Russia symmetrically widened the operational band to 9 rubles.
The mechanism for smoothing exchange rate volatility allowed implementing purchases or sales of foreign currency not only on the band’s borders, but also inside it. The parameters of Bank of Russia FX operations in the domestic market were determined by taking into account the goal of smoothing exchange rate volatility and, effective from 1 October 2013, also given the Federal Treasury operations to accumulate or spend the Reserve Fund and the National Wealth Fund.
In order to smooth the ruble exchange rate volatility the dual-currency floating operational band was divided into internal ranges. The particular volume of FX interventions (in millions of US dollars per day) was determined for each range. At the same time, the central part of the floating operational band included the ‘neutral’ range, where the Bank of Russia did not conduct interventions aimed at smoothing the ruble exchange rate volatility. The closer was the value of the dual-currency basket to the lower (upper) border of the floating operational band, the larger were the amounts of Bank of Russia purchases (sales) of foreign currency aimed at smoothing the ruble exchange rate volatility. The volumes of Bank of Russia operations aimed at smoothing the ruble exchange rate volatility were set symmetrically in relation to the ‘neutral’ range.
The information on the aforementioned parameters of the Bank of Russia exchange rate policy implementation as of 30 September 2013 is provided in Figure 1.
On 1 October 2013, the Bank of Russia informed that it was prepared for the implementation of the new algorithm for accumulation (spending) of sovereign funds in foreign currencies by the Federal Treasury.
As a result, the amounts of Bank of Russia FX operations in the domestic market aimed at smoothing the ruble exchange rate volatility could be increased or decreased by the amount equal to the Federal Treasury FX purchases (sales) with the Bank of Russia related to accumulation (spending) of sovereign funds in foreign currencies. Such an adjustment of Bank of Russia FX operations allowed to transfer the demand for or supply of foreign currency to the domestic FX market. This modification also softened the influence of the Federal Treasury operations, related to accumulation or spending of sovereign funds in foreign currencies, on the banking sector liquidity.
If the Federal Treasury decided to conduct FX purchases (sales) with the Bank of Russia, the net amounts of Bank of Russia operations inside the internal ranges of the floating operational band became asymmetric.
In order to split the internal ranges of the floating operational band, in which the operations to buy and sell foreign currency were conducted or might be conducted, the Bank of Russia introduced an additional ‘technical’ range within the floating operational band. Inside the ‘technical’ range the Bank of Russia did not conduct any operations, including those related to accumulation or spending of sovereign funds by the Federal Treasury. The location of the ‘technical’ range within the operational band could change depending on the direction and volumes of the operations, related to the sovereign funds accumulation (spending). Effective from 1 October 2013, the width of the ‘technical’ range was set at 0.1 rubles.
Effective from 1 October 2013, the parameters of the Bank of Russia exchange rate policy mechanism were set as presented in Figure 2.
The parameters of the Bank of Russia exchange rate policy modified according to the Bank of Russia decision to make the ‘neutral’ range (including the ‘technical’ range) 3.1 rubles wide from 7 October 2013 are presented in Figure 3.
Effective from 22 May 2014, the Bank of Russia decreased FX intervention volumes in the internal ranges of the floating operational band by $100 million to smooth the ruble exchange rate volatility. Effective from 17 June 2014, these volumes were decreased again by $100 million. Effective from 18 August 2014, the Bank of Russia set FX intervention volumes aimed at smoothing the ruble exchange rate volatility at $0 in the internal ranges of the floating operational band.
The dual-currency floating operational band was adjusted automatically as soon as the cumulative volume of FX interventions reached the predetermined level. Between 10 December 2013 and 2 March 2014, the parameters for the shift of the floating operational band were set as follows: when the cumulative volume of Bank of Russia FX purchases (sales) reached $350 million the borders shifted automatically down (up) by 5 kopecks. Starting 3 March 2014, given the increased volatility in the domestic FX market, the cumulative volume of FX interventions of the Bank of Russia was increased to the level of $1,500 million to limit ruble exchange rate fluctuations. Starting 17 June 2014, this value was decreased to the level of $1,000 million. Effective from 18 August 2014, the cumulative volume of Bank of Russia FX interventions was decreased to the prior level of $350 million.
At the same time, the amount of target interventions, which were used for managing flexibility of the floating operational band, was not included in the calculation of the aforementioned cumulative volume. This parameter did not affect the volume of the FX operations implemented by the Bank of Russia, it was applied only for calculating the volume of the interventions accumulated for the shift of the band. If the net volume of Bank of Russia FX operations aimed at smoothing the ruble exchange rate volatility exceeded the target interventions level during a day, the difference between these amounts was accumulated for the subsequent shift of the floating operational band borders during the trading day or in further days, when the set cumulative threshold was reached. In the context of the ongoing transition to the floating exchange rate by 2015 the Bank of Russia cut the amount of target FX interventions step by step. Effective from 13 January 2014, the said amount was equal to $0 per day.
An example of the automatic shift of the floating operational band borders is presented in Figure 4.
Until 5 November 2014, as the ruble value of the dual-currency basket reached the upper/lower border of the floating operational band, the Bank of Russia carried out unlimited foreign currency sell/buy operations. From 5 to 7 November 2014, as the ruble value of the dual-currency basket reached the upper/lower border of the floating operational band, the Bank of Russia carried out foreign currency sell/buy operations with the intensity equal to $350 million per day. Meanwhile, the automatic rule of operational band borders adjustment remained valid.
From 10 November 2014, the Bank of Russia abolished the exchange rate policy mechanism through cancelling the permissible range of the dual-currency basket ruble values (operational band) and regular interventions on and outside the borders of this band. However, the new approach of the Bank of Russia to operations in the domestic market does not provide for complete abandonment of FX interventions, which can be implemented in case of financial stability threats.