Russian foreign reserves reach highest level in 28 months.
The record high was seen in August 2008, when Russia's reserves stood at $598 billion. By January 2014, they were at $500 billion.
The ruble fell after oil prices collapsed in the second half of 2014. Also that year, the United States, European Union, and their allies imposed sanctions against Russia over the conflict in eastern Ukraine.
The central bank spent over $67 billion in a failed attempt to curb a ruble collapse. The Russian currency fell from 35 to 80 against the US dollar on December 16, 2014.
In 2015, the government decided to stop propping up the ruble to save the reserves. The central bank free-floated the national currency and focused on replenishing reserves.
Russia’s reserves consist of foreign currency, special drawing rights (SDR) holdings, reserve position in the IMF and physical gold.
At present, the central bank has slowed the process of replenishing the reserves, as it hopes to cut inflation to four percent from the current 4.3 percent.
"Our policy remains: we will make a decision on replenishment of gold and foreign currency reserves when there will be no risks to our target inflation, which is four percent, and to maintain the target in the medium term,” Governor Elvira Nabiullina said last month.
According to Nabiullina, while the regulator doesn’t reject the idea of replenishing the reserves, they are “by all international standards sufficient,” she said.
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It's When, Not If, Bank of Russia Buys Currency for Reserves.
For economists locked in a waiting game with Russia’s central bank, the divide is over whether its foreign-currency purchases resume in the coming months or only in the years ahead.
Absent from the currency market since 2015, the Bank of Russia will start buying for its international reserves again this year, according to just over half of respondents in a Bloomberg survey of 21 analysts conducted May 2-4, with 28 percent believing purchases may begin already next quarter.
Replenishing Russia's Reserves.
Economists expect the Bank of Russia to start increasing reserves by the end of 2017.
Sources: Bloomberg surveys of economists.
The option remains among the most potent tools left in Russia’s arsenal should the authorities choose to dig in against the ruble’s appreciation. The measures tried so far -- from purchases of foreign exchange by the Finance Ministry to a bigger-than-forecast rate cut by the central bank last month -- have done little to cool of the currency, a top-5 performer in emerging markets this year with a gain of almost 6 percent against the dollar.
In 2015, the Bank of Russia began buying foreign currency when the ruble was near 50 against the dollar. For most of this year, the Russian currency has traded between 56 and 60. It was 0.4 percent stronger at 57.70 versus the dollar as of 5:28 p. m. in Moscow.
The share of respondents seeing the central bank’s purchases start in the second half of 2017 rose to 44 percent from 37 percent in last month’s poll. At the same time, 28 percent now say that policy makers will wait until 2019 or later, compared with 11 percent in the previous survey Although a plurality of analysts see no specific ruble trigger, 30 percent predict a gain to 50-55 against the dollar would set off the operations. Other catalysts may include rising oil prices and an undershooting of the 4 percent inflation target, the survey showed The central bank, which in 2015 announced a goal of boosting reserves to $500 billion in the long term, won’t bring its stockpile to that level until 2020 or later, according to 65 percent, up from 48 percent in the last poll.
The Bank of Russia has allowed the market to set the exchange rate since 2014, pledging to avoid interventions unless the ruble’s swings threaten financial stability. It’s made a resumption of foreign-currency purchases conditional on meeting its inflation target of 4 percent, with Governor Elvira Nabiullina saying in March the operations can’t present a risk to the goal or threaten it over the medium term.
No Time Soon.
Bank of Russia now only seen reaching desired $500 billion in reserves in 2020 or later.
Sources: Bloomberg surveys of economists.
With price growth possibly dropping below the target in the first half of the year, policy makers face one less hurdle to reviving a program that contributed to a bout of ruble weakness and a spike in volatility when they last tried it in 2015.
As a stronger currency weighs on exports and the budget, some cabinet officials have recently stepped up verbal interventions. President Vladimir Putin added to the speculation, saying last month the government is working on “market-based measures” to affect the exchange rate.
The Bank of Russia won’t pull the trigger until the ruble reaches an “equilibrium” and policy makers are sure their actions won’t lead to faster inflation, according to Vladimir Tikhomirov, chief economist at BCS Financial Group, a Moscow brokerage.
“There are indications of both” conditions being in place, allowing for purchases to start already in the third quarter, he said.
Beyond selling rubles in the currency market, the central bank’s options are limited. Even after its April rate cut of half a percentage point to 9.25 percent, most economists said the move simply represented a front-loading of monetary easing rather than an acceleration. As a result, only three analysts said they’d actually adjusted their end-2017 forecasts for Russia’s key rate.
“The latest aggressive cut was fueled by concerns of economic authorities that the ruble has become overvalued given the crude price levels,” said Vladimir Miklashevsky, senior strategist at Danske Bank A/S in Helsinki. “Aggressive monetary easing would add steam to economic growth in Russia, while the Bank of Russia’s consistency in communication could be jeopardized.”
Russia adds yuan as currency reserve.
As of December 31, 2014, the latest data available, the US dollar was still dominating Russia’s forex basket at 44 percent. The second most-used foreign currency was the euro with 42 percent. The British pound made up 9.5 percent.
According to Vesti. Finance, the Central Bank made the decision in November, but hasn’t bought the yuan yet.
The Chinese currency started trading on the Moscow Exchange in 2010. Since then, the volume of trades has grown significantly. This August Russian traders bought a record 18 billion yuan (about $2.8 billion), which is four times more than in August 2014.
Russian investors began looking east, after the US-led group of Western counties imposed sanctions against Russia over Ukraine. Sanctions have deprived Russia access to Western capital markets. In particular, they affected state-owned banks like Sberbank, VTB, Vnesheconombank, Gazprombank and Rosselkhozbank (Russian Agriculture Bank).The lenders were cut off from long-term (over 30 days) international financing.
This news comes before the International Monetary Fund's announcement on Monday whether to include the yuan in its Special Drawing Rights (SDR). The US and Japan, who have been the main obstacle to the yuan being included in the reserve currencies basket, are unlikely to thwart the deal, Eswar Prasad, a professor at Cornell University and former head of the IMF's China Division told Reuters in October.
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Russia's Central Bank to Build Up Forex Reserves for Years to Come.
ST. PETERSBURG — Russia's Central Bank intends to keep accumulating reserves for years to come, until they reach a "comfortable" level up to $500 billion, bank Governor Elvira Nabiullina said on Thursday, as an economic crisis facing the country is far from over.
Her comments signal the bank will continue regular purchases of foreign exchange, a policy likely to weigh on the ruble as the bank would need to buy some $140 billion to restore reserves — now worth $360.5 billion — to the indicated pre-crisis level.
The policy of rebuilding reserves toward this level also underscores concerns that the economy is highly vulnerable to new financial shocks despite recent signs of stabilization.
"In the optimal situation reserves must be enough to cover significant outflows of capital lasting two to three years. Therefore we now consider as very comfortable a level of reserves, covering long stress situations, of up to $500 billion. This is the level that we were used to," she told a banking conference in St. Petersburg.
Last month the Central Bank announced it would buy between $100 million and $200 million each day in foreign exchange to replenish reserves — a pace that would need to be maintained for some three to six years to restore reserves to $500 billion.
Commenting on broader economic trends, Nabiullina said that although economic indicators were better than expected there were no grounds for complacency.
"It is too soon to speak about all the crisis phenomena passing," she said. "Risks have diminished but in essence they remain just the same and we have to be perfectly aware of that."
Western sanctions, introduced against Russia in response to its actions in Ukraine last year, have made it difficult for Russian companies to borrow abroad, requiring the Central Bank to step in heavily to address shortages of foreign currency.
The bank has recently been winding down its repo facilities for lending foreign currency to banks, which Nabiullina said reflected limited need for these facilities now that a peak of foreign debt repayments this year has passed.
However, she said the specific problems facing Russia meant that it still needed forex reserves that far exceed levels implied by international norms.
She said that according to these norms, Russia already has enough reserves, as they are big enough to cover three months of imports, short-term international debt and 20 percent of the money supply.
Based on a composite index of these common standards, the adequate level of reserves for Russia would be $188 billion, she said, with existing reserves almost twice that level.
"The situation is such that we must consider also covering demand for reserves connected with limited access to the markets, [and] with the outflow of capital, for a longer period than is proposed by standard approaches to reserve sufficiency," Nabiullina said.
"Therefore one of the tasks over the period ahead is to grow the reserves over the course of years."
Nabiullina also said the pace of reserve accumulation could be varied depending on market conditions.
She said the policy would not be allowed to interfere with the bank's central monetary policy goal of lowering inflation to 4 percent in the medium term.
Commenting on the bank's interest rate policy, Nabiullina said the bank had cut rates "smoothly" this year as it judged the risk of a cooling economy to be greater than inflationary risks, but she added that a faster pace of cuts would be risky.
"Inflation expectations are still high and a too rapid reduction (of rates) in these conditions could lead to a new wave of destabilization on the currency market and a jump in inflation," she said.
The bank next meets to discuss its key lending rate on June 15, with a Reuters poll of analysts predicting a one percentage point cut.
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