CB Doubles Euro’s Share of Ruble Rate

• Mar. 22 2005 00:00

The Central Bank said Monday it had doubled the euro’s share of the currency basket with which it guides the ruble’s nominal exchange rate, making the new ratio 20 euro cents to 80 U.S. cents.

The move, part of a broader move towards acknowledging Europe’s increasing role in Russia’s foreign trade, should trigger greater volatility in the ruble-dollar exchange rate, as it is forced to reflect ups and downs on global foreign exchange markets.

Before, volatility against the euro was relatively high because it absorbed the entire euro-dollar volatility, said Goldman Sachs economist Rory MacFarquhar. Now volatility against the dollar is rising slightly because more dollar-euro movement is reflected in dollar-ruble.

When the bank first introduced the basket system in February, with 10 euro cents and 90 U.S. cents, it said it would gradually increase the euro’s share as the market adjusted. Analysts expect the share to become roughly even over time.

The increase in the share of the euro in the makeup of the dual currency basket is aimed at achieving further equilibrium in the intraday volatility in the ruble exchange rate to the U.S. dollar and other foreign currencies that are significant to Russia, the Central Bank said in a statement.

The new basket, used for intraday targeting of the nominal exchange rate, came into effect March 15.

It differs from the currency basket Russia uses to calculate the ruble’s real effective exchange rate — a trade-weighted measure that factors in differences in inflation and serves as a measure of whether Russia is losing competitiveness.

The Central Bank runs a twin-track policy of targeting both inflation and the real effective exchange rate.

Some dealers said the news hit the ruble slightly, but others said it was already falling, taking its cue from the euro which was trading at two-week lows to the U.S. currency.

There are many short dollar positions so any negative news causes dollar-buying, one dealer said.

Many take a bullish view of the ruble in light of Russia’s strong fundamentals and high global commodity prices, but so far this year the currency has largely tracked the euro and dollar.

By early afternoon, the ruble was down 0.4 percent at 27.5850 to the dollar, having been fixed at 27.4827 the previous session.

With many Russians earning, spending, saving and thinking in dollars the Central Bank was previously keen to limit sharp swings in the dollar-ruble rate.

The Central Bank, which still intervenes regularly to dampen whatever it sees as excessive volatility, plans gradually to scale back its presence in the market in the run-up to a planned lifting of capital controls in 2007.

However, while Russia’s commodity exports continue to be priced in dollars, the euro will continue to play second fiddle.

The CBR is trying to build the euro into a full-fledged member of the Russian financial system, said UFG economist Yaroslav Lissovolik.

But so far euro turnover is abysmal in comparison to dollar.

 The ruble would need to average 26.9 to the dollar in 2005 to meet an 8.5 percent inflation target, according to a document obtained by Reuters on Monday. However, the paper, agreed on by the Economic Development and Trade Ministry and Finance Ministry and the Central Bank, said 9.8 to 10 percent inflation was a more likely scenario, with the ruble at an average of 27.9 to the dollar — weaker than it is now.

The document is a response to rapid consumer price growth at the start of 2005 — January saw the fastest monthly rise in three years.