(Bloomberg) — Russia’s central bank called an extraordinary meeting Tuesday after the ruble crashed through the 100 level against the dollar for the first time since March last year as Russia’s war in Ukraine continues and international sanctions hit trade.
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Policymakers will release a statement on the policy rate at 10:30 am after the meeting, the Bank of Russia said in a statement, without giving further details. The central bank raised its policy rate by one percentage point to 8.5% last month, the first increase since emergency measures immediately following the invasion of Ukraine in February 2022.
The exchange rate has emerged as the barometer of health for an economy battered by shrinking export earnings and its isolation from international financial markets, revealing infighting between the government and the central bank.
The ruble reversed post-announcement losses and was up 1.8% at 7pm in Moscow at 97.6625. The currency, which broke through 101 earlier on Monday, has weakened by about 27% this year, ranking third among emerging markets’ worst performers. The central bank had tried to halt the slump by saying it will not buy any foreign currency in the domestic market for the rest of 2023.
Kremlin economic aide Maxim Oreshkin blamed the central bank for contributing to the depreciation, an unusual rebuke made public just before the Russian currency broke through $100. The governor of the Bank of Russia Elvira Nabiullina has repeatedly cited the deterioration in trade as the main reason for the weak ruble.
In a rare column from the state news agency Itar-Tass, President Vladimir Putin’s chief economic adviser said that “the cause of the weakening of the ruble and the acceleration of inflation is a soft monetary policy”. Russia needs a strong ruble and policymakers have the necessary tools to normalize the currency value in the near future, he said.
Earlier on Monday, the central bank reiterated that it currently sees no threats to financial stability from the ruble’s performance and is leaving open the possibility of raising interest rates at its upcoming meetings.
The value of exports is facing a “significant drop” at a time when demand for imports is rising amid increased government spending and also due to rapid credit growth, it said in a statement.
The public expression of grievances signals disagreement at the highest echelons of the Russian establishment over how to respond to a crash in the ruble that brought it to levels last seen weeks after the February 2022 invasion of Ukraine.
The central bank announced last week that it would not buy foreign currency domestically under a budgetary mechanism put in place to protect the economy from fluctuations in commodity prices. The decision aimed to “reduce financial market volatility,” it said.
What Bloomberg Economics Says…
“To stabilize the ruble, we estimate that policy rates need to rise closer to 10% and that federal budget spending needs to be kept within the fiscal ceiling. The ruble may benefit from higher crude oil prices, but domestic monetary policy will remain a more reliable anchor for the currency. The Bank of Russia will need to raise key rates by 50-100 basis points at its September 15 meeting to boost domestic savings and reduce imports.”
—Alexander Isakov, Russia economist. For more, click here
The suspension of foreign exchange purchases “has not stabilized the currency,” according to JPMorgan Chase & Co., which now expects the central bank to raise its benchmark to 10% by the end of the year, an increase from its earlier call for 9 %.
The central bank remains committed to a floating exchange rate policy that “allows the economy to adapt effectively to changing external conditions,” Deputy Governor Alexey Zabotkin told reporters on Friday.
Budget situation
But in what amounted to a defense of government policy, Oreshkin said authorities “have succeeded in stabilizing the fiscal position” and expect to record a surplus in the third quarter, with the year-end deficit in line with the planned 2% of gross domestic income. Product.
In the remainder of the year, the amount of extra revenue from oil and gas sales will reach about 800 billion rubles ($8 billion) above a base level in the budget, reducing the need for the government to rely on its wealth fund to close the budget deficit. cover, he said.
Russian oil and gas exporters’ revenues fell from $16.8 billion in the same period last year to $6.9 billion in July, according to the latest data from the central bank. Easing restrictions on moving money abroad has also accelerated capital flight as Russians rush to transfer money to foreign accounts.
“The ruble’s weakening is a result of the international screws turning the Russian economy, but also the costs of keeping the economy afloat,” said Erik Meyersson, chief emerging markets strategist at SEB AB in Stockholm. “Nobody wants to hold rubles, and the limited supply of foreign currency from exporters weighs on the currency.”
–With help from Srinivasan Sivabalan, Colleen Goko, Evgenia Pismennaya and Paul Abelsky.
(Refreshes prices from fourth paragraph)
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