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.