Russia Debates Ruble Fix Without Dismantling Inflation Targeting

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(Bloomberg) — Russian officials are considering ways to keep the ruble on a tight leash without abandoning inflation targeting as they hunt for tools to tame the currency’s surge after sanctions ended the central bank’s ability to intervene directly.

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Rather than removing a commitment to target price growth, officials would need a new mechanism as long as sanctions on the central bank are in place, according to people familiar with the matter. Among other options being considered is a further loosening of rules on currency operations for companies active abroad and more access to foreign exchange for households and businesses at home, they said.

The debate spilled into the public this week when First Deputy Prime Minister Andrey Belousov revealed authorities had discussed prioritizing economic growth and setting a goal for the ruble instead of inflation. The issue has taken on more urgency as the ruble surged to a seven-year high, increasingly posing a threat to exporters and public finances. 

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In the view of some senior officials, Russia needs to devise alternative instruments that would help steer the ruble in a way similar to a system the central bank had in place until 2014, the people said, asking not to be identified because the information isn’t public. At the time, it used foreign reserves to manage currency swings within a corridor.

Not Optimal

Belousov, one of President Vladimir Putin’s top economic advisers, has said an “optimal” level for the ruble is between 70 to 80 rubles per dollar, relative to its Monday closing price of near 55.5. The Finance Ministry based its budget calculations for 2022-2023 around an exchange rate of about 77 and envisages a weaker ruble in the two subsequent years.

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There’s still no consensus about how to proceed, they said. Last week, Putin said “we remain committed” to targeting price growth at 4%.

The ministries of finance and economy didn’t comment on Belousov’s proposals and referred questions on targeting the ruble to the Bank of Russia, whose press service didn’t respond to a request for comment. 

In public comments during recent days, central bankers have pushed back strongly against the idea of special measures to weaken the ruble or setting a goal for the exchange rate.

Policies in Russia are in flux as the economy settles into a prolonged downturn. 

After collapsing in the wake of Russia’s invasion, the ruble has embarked on a blistering rebound as emergency capital controls and sanctions made large-scale capital flight impossible. The currency is up almost 40% this year against the dollar, with the approach of monthly tax payments contributing to its latest bout of strength.

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Surging prices for Russia’s commodity exports, in combination with the collapse of imports as consumer demand sags, have led to a surplus of foreign exchange and powered the ruble despite interest-rate cuts and other steps designed to reverse its rally. 

But now the focus is on how to revive investment and lending, with budget deficits forecast for years to come. Another priority is to narrow the difference between the ruble’s level in the market and the exchange rate available on the street, the people said. 

The dilemma for Russia, however, is that it lacks the tools to tighten the reins on the ruble. 

While the central bank has allowed the market to determine the exchange rate since late 2014, it still conducted operations on behalf of the Finance Ministry to smooth out volatility by absorbing revenue earned above a certain cut-off price of oil. 

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The mechanism was suspended after the invasion this year and a new budget rule may only go into effect in 2025, according to Finance Minister Anton Siluanov. 

Wading more directly into the market is also not an option. Unprecedented measures taken by the US and its allies over the war have deprived Russia’s central bank of access to about half of its holdings, meaning it couldn’t intervene to defend the ruble when it briefly crashed after the invasion.

Authorities considered but ruled out ideas that included a requirement for exporters to convert their earnings to yuan, which isn’t subject to the domestic restrictions on dollars and euros, according to the people. 

Another option that was deemed inefficient, they said, was modeled after Iran’s approach, which has maintained two-tier and, more recently, multiple exchange rates since the US first imposed major restrictions on its energy exports more than a decade ago.