Most Questions of Continuing Ruble Strengthening Remain Hard to Resolve

Today, June 21, 2022, after the opening of the trading session on the MoEx, the U.S. dollar further fell by 1% to 54.83 rubles. The euro lost more than 1.5% and eased down to 57.62 rubles reaching its minimum rate ​​for 7 years since the summer of 2015.

The dollar and the euro for the first time since June 2015 fell below 55 and 58 rubles, respectively. Interestingly, the continuing ruble triumph is taking place against the backdrop of verbal interventions by high-ranking government representatives about a fair dollar exchange rate in the range of 70-80 rubles.

At the St Petersburg Economic Forum, a concrete tentative roadmap was outlined on re-targeting foreign exchange rates in Russia. The head of the Accounts Chamber and former Finance Minister Alexey Kudrin proposed the creation of a new office, calling it the Operator of the Budget Rule, which will replace the Ministry of Finance and the Central Bank in these matters.

Representatives of the financial bloc of the government represented by the Ministry of Finance and the Central Bank opposed the policy of regulating the ruble exchange rate. Foreign exchange rate targeting is a transition to a fixed (as in the UAE) or non-free floating rate (as in China).

Pegging to a foreign currency is achieved through interventions in the foreign exchange market by the Central Bank of Russia. With a strong ruble, the Central Bank is implied to buy the currency until its exchange rate reaches the target, and while ruble is viewed as excessively weak, the Bank of Russia must sell the currency until the target is reached.

In modern Russia’s realities, however, it is not clear to which currency the ruble can be tied. Both the U.S. dollar and euro have become less and less practical to own for their Russian individual and institutional holders. Perhaps a basket of currencies of a number of countries, with which Russia has extensive trade relations such as the Chinese yuan and the United Arab Emirates dirham, could act as a peg. Alternatively, precious metals or commodities are also considered as collateral benchmarks.

One of the simplest, but not the most effective ways is targeting obligatory purchase by the Central Bank to buy foreign currency from domestic exporters. However, the Bank of Russia currently does not really have much use of some major foreign currencies. In addition, the targeting of the ruble exchange rate will lead to the import of inflation.

Another way to reduce export earnings is by rationing exports of oil and gas. But this will lead to an increase in world prices, and the inflow of foreign exchange earnings will not change much of the picture. But markets will be lost. And with a decrease in world prices for raw materials, the flow of foreign currency into the country will significantly decrease. So, many apparent questions pertaining to phenomena of ruble strengthening remain hard to resolve.