Currency Wars are raging in Russia and Switzerland right now

It was only last Monday that I posted a couple of warnings about the current economic situation for Russia. The first was that the increase in the official interest-rate to 9.5% and the currency intervention were unlikely to work.

Extremely rarely is there any success to be found here. The issue is that it finds itself doing what it should always be doing its best to avoid which are operations in extremis……Currency intervention has a similar problem in that world markets are so large that they are likely to dwarf whatever resources the central bank can throw at them.


This scenario usually happens quite quickly and I pointed out that even the strong (in terms of foreign currency reserves) Russian bear was likely to take a bit of a mauling.

Once that happens a few times it starts to look at its rapidly dwindling reserves and depending on the quality of its individuals either start a rethink or panic.


Actually the subsequent week has seen signs of both a rethink and some panic. I guess it is invariably thus. It only took a couple of (what at the Central Bank of Russia must have seemed very long) days for things to change.

Effective from 5 November 2014, the Bank of Russia adjusted its approach to foreign exchange interventions on the borders of the floating operational band to further increase the ruble exchange rate flexibility…..As a result of the implementation of this decision, the ruble exchange rate will be determined predominantly by the market  factors.


What did these market factors do? They pushed the Ruble even lower. At the time of my update it was at 43.3 versus the US Dollar and by Friday was heading towards 49 versus the US Dollar. So it was time for a rethink or some panic, take your pick.

According to Bank of Russia estimates, with due account of the measures taken and the occurred decline in the exchange rate, there is no need for the ruble to depreciate further to reach the balance of payments equilibrium…….. Against this backdrop the Bank of Russia is prepared to increase FX interventions at any moment, as well as to use other financial market instruments available.


So just to be clear we had an intervention policy on Monday which was abandoned on Wednesday but some of it might have returned on the Friday! Even Craig David took seven Days not five.

I met this girl on Monday
Took her for a drink on Tuesday
We were making love by Wednesday
And on Thursday & Friday & Saturday we chilled on Sunday.


Along actually events have moved apace (again) already today so perhaps Craig was right with his timetable after all. I will discuss the actual announcement in the next section but the Ruble has strengthened back to 45 versus the US Dollar. Also Vladimir Putin has backed the Ruble in a speech and after all who wants to argue with him? And there is the Sino-Russia gas deal to consider as well as a bounce in the oil price. Also we have to consider that markets like this are prone to sharp reversals. But let us move on with a look at what this phase has cost Russia.

In order to hamper the ruble’s depreciation in October alone the Bank of Russia conducted interventions for the amount of USD 30 billion.


Oxford Economics estimates that since defending the Ruble has cost the Bank of Russia around US $4 billion.

What about inflation targeting?

Another main feature of Russia economic life these days is raging inflation. The last consumer inflation data showed it to be running at an annual rate of 8.4% and there were falls in the currency which had taken place since then that seem likely to push it higher again. There is of course an irony of this taking place in a period where inflation is supposed to have died a death.

The Bank of Russia had previously decided to target inflation and the interest-rate rise to 9.5% was part of its efforts to rein it back in. Will it do more? Er no! Like many central banks these days it retreats in the face of actual inflationary pressure. From this morning’s announcement and the emphasis is mine

Our objective is to reduce inflation to 4% in the medium run. This is an ambitious goal. However, we are not trying to achieve it as soon as possible and at any cost. We plan to reduce inflation to the target gradually, taking into account the potential of the Russian economy.


The asymmetry rule

Central banks in these times run a completely asymmetric inflation targeting regime. Falls below the target especially if they approach zero for the annual rate provoke something of a frenzy accompanied it must be said by a media panic. At such a time the consumer or worker is wondering why price increases are so good for them?!

On the other side of the coin inflation above target is something that is “temporary” and can be looked through. This is using temporary as in the definition provided by my financial lexicon where it only has to end before time itself does to qualify. Usually the amount above target is higher and often much higher than the amount it is undershot by in the alternative scenario but that seems to bother almost no-one.

Back to Russia

Actually the inflation target for 2014 was 4.5% as recently as September 2013 so as you can see there is quite some slippage in the raising of it to 5% back then but now in the delaying of the 4% objective until 2017.

I used to be uncertain but now I am not so sure!

Today’s Bank of Russia announcement apparently takes it towards an inflation targeting regime.

An important step towards improving the efficiency of monetary policy transmission mechanism will be the transition to a floating exchange rate regime. The floating exchange rate will allow the Bank of Russia to focus on steering interest rates and achieving the inflation target


Except the inflation targets always seem to be far away in the distance! Also it does not seem entirely clear on the concept of a floating exchange rate.

the central bank can conduct operations in the foreign exchange market or employ other tools to stabilise the situation.


What about economic growth?

I guess that is one of the “challenging issues” that the Bank of Russia mentioned this morning. It has suggested that the whole of 2015 will see little or no economic growth which makes one consider what it really thinks?!

What about the Swiss Franc?

This has been on the march in recent days and on Friday I noted that at 1.203 versus the Euro it was approaching the level (1.20) at which the Swiss National Bank had promised us “unlimited” intervention. I used the modern version of thinking out loud (Twitter) to wonder if the SNB had gone home early for the weekend? Now if you ask the question who might be keen on the “safe haven” status of the Swissy right now it is hard to think of people with more possible enthusiasm that Russians right now! In the dark world in which we live perhaps the talking up of the Ruble today provides an opportunity for those in authority to do exactly that?

Whatever the reason we may not be far away from the SNB actually intervening (it usually starts ahead of the 1.20 mark). Now in such a scenario its large currency reserves would get larger. Should this happen and the Swiss vote to put 20% of their reserves into gold at the end of this month, well what could go wrong?


There are lots of implications from all this. Both Russia and Switzerland have inflation targeting regimes but the pressures on them are completely opposite. In the one directions the SNB offers us “unlimited” intervention and in the other the Bank of Russia retreats. As both consider foreign currency intervention we are left wondering if a “free floating currency” is an oxymoron or perhaps something of a fraud.

The ordinary Russian worker and consumer must be under extreme pressure right now. A weak economy is accompanied by double-digit food inflation and the currency is swinging wildly.






14 thoughts on “Currency Wars are raging in Russia and Switzerland right now

  1. Hello Shaun,

    “The ordinary Russian worker and consumer must be under extreme pressure right now. A weak economy is accompanied by double-digit food inflation and the currency is swinging wildly.”

    But I’d posit that this is the exactly the plan – to punish the people so they will be ready to throw Putin out .

    Economics is after all just another weapon to beat up your enemies with !

    along with subverting the market prices – re : oil


    Ps: be happy – go out an shop ! Easter soon!

    • Quite likely, Forbin. I notice that Larry Elliott’s most recent column in The Guardian

      argues that the Obamateurs have talked Saudi Arabia into increasing oil production and hence lowering oil prices to hurt Moscow and Tehran. No-one would ever accuse Mr. Elliott of being a Kremlin troll. In May, Michael McFaul, who previously served as Obama’s ambassador to Moscow, vehemently denied that the Obamateurs had any plans to destabilize and depose Putin:

      Never believe anything until it is officially denied.

    • Hi Forbin

      I take your point that the western plan is to squeeze Russia economically. However the danger of that sort of thing is that plenty of countries in the past have used an actual war to divert the population from economic difficulties.

      Of course if the Euro area plan is to squeeze people economically to get them to overthrow their leader what does this mean for Greece, Portugal and Italy?

    • Sorry, the “western conspiracy to reduce the oil price” is hard to believe.

      The west needs oil and cannot not buy. Recently we had statistics detailing capacity increase projections from 2012. Do you remember the 1970s crisis – Saudi stopped selling and the price skyrocketed.

      I suggest over supply is responsible …

  2. Hello Shaun,

    A small but significant divergence has occurred today …..

    “The rules, created by the Financial Stability Board (FSB), a global regulator, will require big banks to hold much more money against losses.

    Mark Carney, FSB chairman and governor of the Bank of England, said the plans were a “watershed” moment.”

    FSB – did I vote any of them in ? no ?

    and they are a Global Regulator as well , Alas poor Democracy ! I knew her well !


    PS: Are the TPTB finally showing themselves ?

    got that comfy sofa ? lay on the popcorn , as Zuse said in Tron Legacy , “this is going to be quiet a ride !! “

    • Hi Forbin,

      I wonder if this will trigger a tightening of lending leading to credit crunch phase 2? It’s all looking very precarious. Normal service will not be resumed any time soon!

      • If I misquote: “appearances, dear boy, appearances”.
        Could be a major earnings opportunity for those creative consultants that managed to get Greece into the EU

  3. On the subject of inflation, exciting news from the Institute of Misleading Comparisons (IMC): During the big bang inflation is estimated to have increased the size of the universe by 10^26 times in (far)less than a trillionth of a second.

    Monetary inflation lead than this can therefore be described as “mild”.

  4. Great column, Shaun, as usual.
    Chris Giles wrote on October 23 about Ben Broadbent, the deputy governor of the Bank of England, being asked if the target rate should be raised to four percent:

    Apparently, Mr. Broadbent “said it was not his role to set the inflation target, but the idea that higher inflation targets made monetary policy management easier contained, ‘impeccable logic’”.

    Think about it. If the target rate is 2%, and the upper bound is 3%, then with a 4% target rate, one should be easy as pie to keep inflation under 6%, if not under 5%. But the Russian inflation rate just went up from 8.0% in September to 8.3% in October.

    It is even worse if you look at Ukraine. In September 2012, the National Bank of Ukraine said that in “2013-14 the annual consumer price index growth rate must stabilize within the 4-6% range and subsequently maintained within the 3-5% range beginning from 2015.” So the NBU opted for a target range rather than a target rate, but the mid-point of the range was the same 4%. In October 2014 the CPI inflation rate was 19.8%, up from 17.5% in September. The NBU is nowhere close to hitting their old target for 2014, and has revised its target to 12%, while maintaining the longer term inflation target range at 3-5%.

    To be sure the NBU couldn’t have forseen the tragic events that have taken place from February 2014 forwards. Just the same, the experience of the former Soviet Union hardly inspires confidence in a 4% target rate. It seems that if a central bank sets a 4% goal it can anticipate double-digit inflation or close to it.

    • Hi Andrew

      You make a good point and well spotted! This does rather tell the lie that a higher inflation target will be easier to hit. The truth is that it is easier for the establishment to make people worse off whilst telling them they are better off. I replied to Andrew Finney that the UK ex-FSA head Adair Turner has been beating this kind of drum today at Project Syndicate. It gave me a wry smile as he is “Senior Fellow at the Institute for New Economic Thinking” and yet churns out thoughts the establishment would love.

      Also there is the issue that the places where a 4% inflation target is recommended currently cannot hit the 2% one…… And let’s face it the Bank of Japan could not be trying much harder (just for clarity I am subtracting the inflation caused by the Consumption Tax increase).

  5. The Russian central bank must be singing along to “Back in the USSR” – with possible reinstatement of currency exchange controls and the dollar ownership ban.

    The Japanese restart of several reactors will dampen demand for gas ….

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