The authorities are ready to slow down the fall of the ruble with foreign exchange interventions: what are the risks

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One of the most turbulent weeks on the foreign exchange market has come to an end, which was marked by a sharp fall in the ruble. Now the rate is under 92 for the dollar and under 100 for the euro. There is hope that next week the ruble will stabilize around these levels. And if not, and stock speculators will continue to play for a fall? In principle, the authorities have tools that can remedy the situation. So, for example, the regulator can sharply raise the key rate, foreign exchange interventions on the stock exchange, which the head of the Bank of Russia Elvira Nabiullina spoke about recently, can also be applied. Meanwhile, experts interviewed by MK warn that the use of such a financial instrument as foreign exchange intervention carries certain risks: support for the ruble will be short-term, but inflation can accelerate in earnest.

Dmitry Babin, stock market expert at BCS World of Investments:

“To stabilize the situation, the Central Bank may resort to selling foreign currency on the exchange market at the expense of large foreign exchange reserves. In the short term, foreign exchange interventions by the Central Bank are a fairly effective tool. First of all, as a remedy against excessive emotionality in the actions of a large number of market participants who rush to buy currency, seeing how its quotes go higher and higher. Together with the forced closing of short positions (shorts), this creates a self-reinforcing effect that sharply accelerates the depreciation of the ruble.

However, we must be aware that the fundamental factors that caused the steady weakening of the ruble have not gone away. First of all, it is the volume of export earnings that has decreased due to relatively low prices for oil and gas. As a result, foreign currency entering the country is not enough to comfortably meet the restored import without a significant weakening of the ruble. Therefore, currency interventions will not be able to significantly and permanently strengthen the ruble until key external and internal conditions change.

Due to the short-term effect of foreign exchange interventions, they are unlikely to have any noticeable negative consequences. At the same time, a significant weakening of the ruble with a certain time lag accelerates inflation, especially the rise in prices for imported goods.”

Ivan Samoylenko, managing partner of B&C Agency:

“Currency interventions are a working tool for balancing the exchange rate of the national currency. When the dollar grows and the demand for it rises, the Central Bank sells the currency from its reserves; when the dollar falls and the demand for it decreases, the regulator buys it. Accordingly, this leads to some weakening or strengthening of the dollar within our country.

But at such a rate of growth in the value of the dollar and the euro, as it is now, interventions alone may not be enough – there may simply not be enough currency reserves. After all, dollars and euros are not supplied to Russia due to sanctions, the available currency is the result of foreign trade operations and the work of business with its partners abroad. A certain currency deficit is one of the reasons for the growth in the value of the dollar in recent days. Therefore, the main danger of foreign exchange interventions is that there will not be enough reserves for a strong depreciation of currencies. And they are needed for the stability of the country’s financial system and to replenish the liquidity of banks.”

Guzel Protsenko, CEO of Alfa Forex:

“Currency interventions carry pro-inflationary risks, which obviously does not correspond to the main directions of the Central Bank’s monetary policy. In addition, this is a temporary solution that can help delay the fall of the ruble, but does not at all guarantee long-term stability of the exchange rate. To achieve a stable strengthening of the ruble, a qualitative change in other fundamental factors is necessary.

At the same time, the use of foreign exchange interventions does not even guarantee that a certain level of ruble appreciation will be achieved.”

Artem Deev, head of the analytical department at AMarkets:

“The financial intervention of the Central Bank, of course, will be quite an effective measure in the short term. This will strengthen the ruble, raise its exchange rate against the traditional dollar/euro currency pair. But at the same time, it will drive up inflation. However, from the point of view of the authorities, the ruble is still within comfortable limits, but its further weakening will clearly threaten pro-inflationary risks. Therefore, intervention may still be necessary.

I think that the threshold can be considered a sharp jump in the euro to 150-170 rubles, followed by a plateau. Then the situation will already be critical, and drastic measures will be needed. To avoid such risks, the Central Bank may, for example, raise the key rate from the current 7.5% to immediately up to 8.5%. Plus, now we are talking about cutting budget spending by 10% (excluding social obligations and the defense industry). All this together, in my opinion, will slow down the growing rate of inflation and reduce risks for the country’s economy.”

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