Russia will only take its battle against inflation so far. Reserves and the ruble’s free float is where it draws the line.
Authorities are looking at how to keep tapping a wealth fund to cover the budget deficit even though their method of doing so floods the economy with excess cash, according to four officials familiar with the discussions. For now, the central bank wants to stick to printing rubles when the government withdraws foreign currency, instead of converting it through sales on the open market, the people said, asking not to be named because the deliberations are private, Bloomberg reported.
Such sales can prevent a buildup of liquidity that threatens to spur inflation, two of the people said. But the risk is that they may fuel ruble volatility and imperil the stockpile of foreign currency that’s been a strategic buffer as western sanctions and oil’s crash pushed Russia into its longest recession in two decades. By printing rubles for the finance ministry and crediting foreign currency to its own account, the central bank has kept international reserves—which include the government’s savings—almost intact even as the wealth fund has dwindled by more than half since 2015.
The choice highlights the competing priorities pulling at the central bank as deficit spending to reverse the second year of recession pushes the financial industry into liquidity surplus for the first time since 2011. The benefits of the central bank entering the market would pale in significance to the risk of withering international reserves or stoking ruble volatility, the people said.
Safeguarding Reserves
The central bank, which hasn’t sold foreign currency since shifting to a free float in late 2014, has pledged to avoid interventions unless the ruble’s swings threaten financial stability.
The approach to safeguarding foreign currency as the government draws down its savings has left reserves walled off from the turmoil battering the economy of the world’s biggest energy exporter. While international reserve assets excluding gold are down more than 10% in the past year in China and Saudi Arabia, Russia has boosted its stockpile by 8%, according to data compiled by Bloomberg.
The Russian currency has appreciated almost 15% against the dollar this year after a 20% loss in 2015, second only to Brazil’s real among emerging markets.
The Reserve Fund, which in dollar terms peaked at $142.6 billion in 2008, has since declined to $38.6 billion at the end of May. The finance ministry, which channeled 2.6 trillion rubles ($40.6 billion) from it into the economy in 2015, injected a further 780 billion rubles this year, or more than a third of the plan for 2016.
