Bank of Russia Halts FX Buys as Ruble Slumps Near 100 to Dollar

The Bank of Russia announced it will halt purchases of foreign currency on the domestic market for the rest of 2023 in an effort to help the ruble as the currency slumped toward 100 per dollar, its weakest in 16 months.

(Bloomberg) — The Bank of Russia announced it will halt purchases of foreign currency on the domestic market for the rest of 2023 in an effort to help the ruble as the currency slumped toward 100 per dollar, its weakest in 16 months.

“The decision was made in order to reduce the volatility of financial markets,” the central bank said in a statement late Wednesday. 

The bank won’t buy FX on the domestic market as part of mirroring operations with the Finance Ministry under Russia’s budget rule, which was put in place to insulate the economy from swings in commodity prices. It will continue to sell foreign currency related to the use of funds from the National Wellbeing Fund, the central bank said.

The ruble has weakened by about 24% against the dollar so far this year, placing it among the three worst emerging-market performers with the Turkish lira and the Argentine peso. The currency weakened past 98 per dollar during trading on Wednesday and is nearing 100 to the greenback, a level last seen during the first month after President Vladimir Putin ordered the February 2022 invasion. 

“The decision to suspend purchases should provide material relief to the falling ruble,” Bloomberg Economics Russia economist Alexander Isakov said. “The Finance Ministry’s FX demand has been light, but in the next four months it would have totaled an amount that Russia’s increasingly fragile FX market could not have handled well.”

The current account surplus — roughly the difference between exports and imports — declined to $25.2 billion in the first seven months of this year, down from $165.4 billion in the same period in 2022, data published Wednesday by the Bank of Russia showed. The surplus was $1.8 billion in July compared with $17.8 billion a year earlier, according to the bank.

Central bank Governor Elvira Nabiullina has repeatedly pointed to the deterioration in foreign trade conditions as the main reason for the ruble’s collapse, while ruling out intervention to support the exchange rate. The currency has almost halved in value from last year’s capital-control peak amid increased government spending, falling energy revenues and a move by Russians to put funds in foreign accounts.

The most recent central bank data showed that major Russian exporters sold 84% of their foreign exchange revenues on the market in June. But their proceeds — a key source of hard currency for Russia since the invasion — declined to just $6.9 billion in July from $16.8 billion in the same period last year. 

While flows of imports remain stable, restrictions on Russia’s energy sales, including an oil price ceiling aimed at limiting the Kremlin’s ability to feed its war machine, have led to a steady decline in exports. Coupled with an increase of the ruble’s share in trade, the inflow of hard currency is falling.

The negative trend hasn’t reversed even as Russia’s flagship Urals crude last month breached the price cap set by the Group of Seven nations. 

If that move holds, then the inflow of foreign currency to the Russian market should gradually increase, according to Andrey Kochetkov, an analyst at Otkritie Bank FC in Moscow. Still, the ruble’s decline isn’t solely due to the deterioration of the trade balance, as “there is capital flight, including the withdrawal of money by exiting foreign companies,” he said. 

What Bloomberg Economics says

Ruble weakness comes down to capital outflow, which itself resulted from mis-calibrated domestic policy. The government’s 14% year-on-year spending surge boosts demand for imports at a time when export revenue is dwindling. At the same time, households have moved around $40 billion to foreign banks as ruble interest rates have fallen short of inflation expectations and a growing number of Russian banks have been cut off from global payment systems.

Alexander Isakov, Russia economist 

Central bank data published Monday showed deposits of Russian citizens in foreign banks increased in June by more than half a trillion rubles, the most since December. The volume of Russian money held abroad reached 6.4 trillion rubles ($66 billion) as of June 30.   

The ruble may find more support in the coming months if the central bank hikes borrowing costs to 9.5% and the authorities slow expenditure, according to Isakov. 

The bank hiked its key interest rate by a percentage point to 8.5% last month, the first increase since emergency measures imposed immediately after the invasion, as policymakers responded to inflationary risks from government spending, sanctions and labor shortages caused by the call-up of men to fight in Ukraine. 

The psychologically important mark of 100 per dollar may be reached soon, according to George Vaschenko, deputy head of research at Freedom Finance Global in Astana. “I wouldn’t expect the weakening trend to stop,” he said. 

(Updates with current account data in third paragraph)

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