January 15, 2014 / 7:32 AM / 4 years ago

UPDATE 2-Russian central bank backs free float as economic shock absorber

* Central bank scales back interventions

* We have no exchange rate target - Yudayeva

* Focus on bringing down inflation (Adds context, wraps in finance minister)

By Douglas Busvine and Jason Bush

MOSCOW, Jan 15 (Reuters) - Russia’s central bank has no exchange rate target and is shifting towards a free float of the rouble to insulate the economy from volatility on global markets, First Deputy Chairwoman Ksenia Yudayeva said on Wednesday.

The central bank’s top technocrat was addressing concerns that emerging economies are vulnerable to cross-currents from the withdrawal of U.S. monetary stimulus at a time when central banks in Europe and Japan are still easing policy.

“We really don’t have an exchange rate target - we are exiting the market,” Yudayeva said in a speech to the Gaidar Forum, a conference in Moscow.

The Bank of Russia plans to shift to a full free float of the rouble by the start of next year, and this week it scrapped so-called ‘targeted’ currency interventions in a further technical step towards that goal.

It has left in place a mechanism under which it buys or sells $350 million on the market before adjusting a corridor it targets for the rouble against a currency basket made up of dollars and euros.

This regime is designed to smooth volatility but not defend levels. The ending of targeted interventions is likely to increase the frequency of shifts in the currency corridor, which currently extends from 33.20 to 40.20 roubles.

The rouble has touched new four-year lows this week against the currency basket - a proxy that roughly reflects the trade relations of Russia’s $2 trillion economy.


Yudayeva, a U.S.-educated economist hired by new central bank Governor Elvira Nabiullina last year, is driving the long-planned shift away from targeting the rouble’s exchange rate to putting the primary focus on inflation.

“Targeting the exchange rate is incompatible with targeting inflation,” she said. The former, she added, tended to result in external shocks being directly transmitted to the economy.

Finance Minister Anton Siluanov told the conference that expectations the U.S. Federal Reserve would scale back its huge monetary stimulus programme had caused a significant outflow of capital last year from emerging economies.

The Fed started to reduce its bond-buying with newly printed money last month, but emerging economies are now better prepared to cope, he said, identifying a possible decline in the price of oil and gas - its main exports - the main risk for Russia.

“We need to be ready for this - and ready in advance,” Siluanov said, urging the government to accumulate further fiscal reserves in the favourable current oil-price environment.

Although Russia posted a federal budget deficit of just 0.5 percent of gross domestic product last year, less than the 0.8 percent level it had targeted, Siluanov said there was no reason to be complacent.

After stripping out energy revenues the fiscal deficit was 10.2 percent of GDP, a level Siluanov called “significantly high”.

“It is our goal to reduce (the non-oil deficit) to a level of 5-6 percent (of GDP) that I consider is not risky,” he said.

He cautioned that fiscal targets would be tough to hit this year, adding that the 3 percent economic growth forecast on which the budget was based was “ambitious”.


Under its former management, the Russian central bank in 2008-09 spent $200 billion - or a third of its foreign reserves - in a costly defence of the rouble.

While the defence allowed Russian companies and banks to refinance foreign debts, thereby averting a financial meltdown, the economy suffered a 9 percent contraction in 2009.

“Our strategy will insulate our economy from fluctuations on global markets,” Yudayeva said.

She restated the central bank’s primary goal was to reduce inflation steadily. This, in turn, would lay the basis for long-term saving and investment in Russia.

The central bank’s year-end inflation target for 2014 is 5 percent, falling to 4.5 percent in 2015 and 4 percent in 2016.

Inflation overshot last year’s 5-6 percent target range, with Russia - like other emerging markets - suffering from a negative combination of sharply slowing growth and inflationary conditions, Yudayeva said. (Reporting by Jason Bush; Writing by Douglas Busvine; Editing by Catherine Evans)

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