The US dollar has appreciated against the rial in recent weeks but this time depreciation of the rial coincided with the unprecedented sinking of the Russian ruble for the first time since 1998.
Accordingly, the central banks in Tehran and Moscow have come up with rescue plans for their national currencies, as their oil-reliant economies were hit by the plunge in oil prices.
In the past few days, the Central Bank of Iran (CBI) issued an official statement explaining that “its intervention in the foreign currency market was intended to manage the fluctuations and stabilize rates.” In this respect, Valiollah Seif, the CBI governor, said that the bank “will utilize a set of tangible and intangible tools.” It seems that his remarks are the only tangible part of the plan.
However, a review of government policies in currency markets indicates that the instruments used by the state to control the markets are of a different nature from those in Iran. Application of the same tools in Iran may not be that easy in light of CBI’s weak legal and structural authority.
Regardless of how the CBI has acted in controlling market fluctuations, there are differences in the currency market rescue plans of Tehran Moscow.
Bank of Russia Vs CBI
The Bank of Russia, or the Central Bank of the Russian Federation, reacted to the depreciation of the ruble against major foreign currencies by setting the biggest interest rate rise since 1998. Soon after the “black Monday” of the Russian economy and severe volatilities on December 15-16, the Bank of Russia immediately started a step-by-step interest rate rise to counter capital flight.
It should be noted that the deterioration of Russian economy had already started in early 2014 and was later accelerated by the West’s diplomatic pressure against the country doubled with plunging oil revenues.
The political and economic developments in 2014 led to the depreciation of the ruble by half, forcing the Russian central bank to raise the interest rate from 5.5% in early 2014 to 17%.
The Bank of Russia also used “official statements” as a tool to influence the expectations of traders and possibly the whole currency market.
In this respect, unlike Iran, the governor of the Russian central bank did not get involved personally but announced his bank’s stance through tactical rhetoric.
For instance, to explain the interest rate rise, the statement said, “This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks.”
Not Popular
In Iran, however, these methods are not very popular and the statements by the governor of the CBI have simply revolved around “promises” to keep the market stable.
The central bank of Russia, as the third measure, increased the supply of foreign currency. Such a measure has also had precedence in Iran, though in the Rouhani administration it has not been officially confirmed.
It was noted that before the dollar was traded at 35,000 rials in the currency market, the exchange offices of certain banks offered the dollar at significantly lower rates in order to curb the soaring rate. However, they used the most primitive method to do so, by hiring someone to shout their lower prices on Ferdowsi Street, center of foreign currency trade in Tehran. In contrast, the Bank of Russia increased the maximum volume of foreign currency it provides to Russian banks via its FX repurchase agreement auctions for 28 days to $5 billion from $1.5 billion.
In parallel, the central bank of Russia adjusted policies of other markets with foreign currency stability as a priority.
For instance, it announced that “in order to strengthen the efficiency of monetary policy, loans secured by non-marketable assets or guarantees will be provided at a floating interest rate for 2 to 549 days.”
Despite its limited power to prevent further ruble depreciation similar to other tools, the central bank’s policy shored up confidence in the monetary system of Russia amid the currency crisis and slowed down the pace of capital flight.
As the ruble partially rebounded, authorities announced that weaker currency better generates revenue from export of oil, gas, metal and grain. However, on the other hand, concerns were raised over the difficulty of foreign debt repayment many Russian banks and companies are facing, which is estimated at $120 billion.
In addition, the Bank of Russia, which manages foreign exchange policy under a managed float exchange rate regime, has recently decided to change the boundaries of the dual-currency operational band that is a weighted basket of 55% in the US dollar and 45% in euro and defines the scope of FX volatility.
Despite all differences in application of tools, the type of Russian government’s intervention is reminiscent of past experiences. “Investing” news portal reported earlier that “at a Moscow bureau de change, the money changer asked for 85 rubles for a dollar, though the rate given on the door was 80 and the official rate was 60.” Vladimir Putin, the president of Russia, has blamed the slide in ruble on speculators and the West.
Highlight: Accordingly, the central banks in Tehran and Moscow have come up with a rescue plan for their currency market, as their oil-reliant economies were hit hard due to the plunge in oil prices.
