The Central Bank of Russia (CBR) announced halting purchases of foreign currency on the domestic foreign exchange market from November 28 until the end of 2024 as part of the  budgeted regular currency interventions with the Ministry of Finance, in “order to reduce the volatility of financial markets”.

As analysed in detail by bne IntelliNews, since the introduction of the latest US sanctions against the Russian financial sector, ruble continues to weaken, falling below RUB105 to the dollar – its weakest level in years and below the "psychological" mark of RUB100 to US dollar.

The CBR has set the official US dollar exchange rate for November 28 above RUB108.

From August 2023 to the end of 2023, the CBR had already suspended Fx purchases on the domestic market amid a sharp weakening of the ruble.

Under the budget rule, the latest version of which has been in effect since the beginning of 2023, a base amount of oil and gas revenues was introduced (RUB8 trillion annually), and all revenues above this amount must be transferred to the National Welfare Fund through purchases of Chinese yuan. 

The resulting currency interventions are carried out by the CBR on behalf of the Ministry of Finance. If the situation is reversed (insufficient oil and gas revenues), the MinFin and CBR, on the contrary, sell yuan.

As reported by bne IntelliNews, before the suspension of currency purchase operations in November, the CBR sold the equivalent of RUB4.2bn of foreign currency on the domestic market every day. Now, the CBR could buy up to RUB8.4bn on the market daily instead.

“This measure will certainly provide some support to the RUB, but such an increase in the supply of yuan on the exchange segment of the currency market is unlikely to solve the systemic problem of the need to adapt the system of cross-border settlements to the new round of sanctions,” Renaissance Capital analysts warn.

The analysts surveyed by RBC note that the ruble is still in the active weakening phase despite the Finance Minister Anton Siluanov attempting to cheer up the market by arguing that a weaker ruble will benefit the exporters. 

Even the upcoming end-of-the-year tax payment period that historically increases demand for rubles is not expected to help strengthen the ruble without active measures from the authorities.

However, the instruments available to the government and the CBR remain limited, as the key interest rate is already at record-high 21%. With current ruble volatility, the key interest rate would have to be raised to 30% to 40% or even higher, Dmitry Polevoy at Astra Asset Management argues, as cited by RBC.

Previously the government would oblige the exporters to sell their Fx revenues to stabilise the ruble, but currently the share of rubles or “friendly” in cross-border settlements has already reached 82% in exports and 78% in imports, Economy Minister Maxim Reshetnikov estimated  as cited by The Bell. 

Latest sanctions against the “energy” bank Gazprombank are likely to further complicate efficient repatriation of Fx exports revenues.

RenCap analysts also believe that ruble’s “margin of safety” in case of stresses has weakened considerably after the latest easing of capital controls (reduction to 25% from 50% of the norm for the sale of export proceeds).

As a reminder, the ruble exchange rate is one of the most closely watched economic indicators by ordinary Russians, and RUB100 to US dollar is a “psychological” threshold the risk of breaching which would usually provoke a strong policy response. 

But this year Russian authorities showed readiness to let the ruble weaken beyond the RUB100 per US dollar, in order to help the state budget and the military-driven fiscal stimulus.

But the ruble weakness will put a lot of pressure on the Central Bank of Russia (CBR) ahead of the upcoming policy board meeting on December 20. The regulator had already been expected to hike the key interest rate of 21% by another 1 to 2 percentage points. But ruble weakening is likely to further worsen inflation expectations.

The first deputy chairman of state controlled VTB Bank Dmitry Pyanov estimated that a 10% decline in ruble would add more than 2pp to inflation versus a much more moderate 0.5pp to 0.6pp estimate of the CBR.

Most likely, the current situation will end with the ruble “resetting” to a new “equilibrium” level, from which the market will subsequently make new forecasts, RenCap analysts suggest while seeing the ruble remaining above RUB100 to US dollar, but seeing RUB115 exchange rate as excessive weakening.