Bank of Russia caps daily forex interventions

The Bank of Russia today announced it will limit daily foreign exchange interventions to $350 million in a bid to "further increase" the flexibility of the ruble.

The central bank also introduced a new, 12-month forex repo instrument aimed at ensuring the Russian banking sector has access to dollars amid "restricted access to international capital markets".

The measures, both effective from today, follow a tumultuous month that saw the Bank of Russia spend more than $30 billion to defend the rule, which is down 31.5% against the dollar since June.

The bank spent $3 billion supporting the currency in a single day on October 29. It raised interest rates by 150 basis points to 9.5%, the highest point since 2009, two days later.

These measures did little to assuage investors, however, who have continued to exit the ruble amid uncertainty over Western sanctions against Russian companies and lower oil prices.

The ruble currently trades at 44.3 against the dollar, compared to 43 on October 31 and 33.6 on June 27.

'Very big deal' has Putin's support

The Bank of Russia manages the exchange rate by keeping it within a set trading band - though the band moves by five kopecks whenever it buys or sells ruble for $350 million.

The value of daily interventions will now be limited to that sum, the central bank said today. It is the strongest commitment yet by the central bank to abandoning its interventionist policy.

"As a result of the implementation of this decision, the ruble exchange rate will be determined predominantly by market factors," the Bank of Russia said in a statement.

It added the "abandonment of unlimited foreign exchange interventions" would reduce the incentives for "speculative strategies" against the currency.

"This is a very big deal," said Oleg Kouzmin, an economist at Renaissance Capital in Moscow. "Effectively, it means that the CBR has nearly abandoned the floating band".

"As for the Kremlin  – I think it would not create any problem," Kouzmin added. "Even [Russian president Vladimir] Putin said recently there was no need to spend huge amount of reserves to support the ruble".

Interventions to safeguard financial stability

The Bank of Russia maintained it would be "ready to carry out additional interventions" to ward off threats to financial stability. It did not specify what would constitute such a threat.

The central bank is scheduled to replace its current ‘managed float' regime with a formal inflation-targeting framework on January 1.

Theoretically, that will limit the central bank's ability to control the value of the ruble as long as Russia retains an open capital account.

In practice, however, the overhaul may prove largely cosmetic. Last month, Nabiullina told lawmakers in Moscow the bank was "not going to quit the foreign exchange market completely".