The most effective and efficient exchange rate control lever in Russia is the intervention of the ruble. What is it, try to find out gradually. The procedure, in fact, is a large-scale purchase or sale of domestic currency of the Central Bank of the Russian Federation, which allows you to bring the rate of the latter to a certain level. The strategy is based on the rule on the value of the ruble: an increase or decrease in demand for the national currency within the international market leads to its cheaper or more expensive, that is, to an increase or decrease in quotations.
Why should the Central Bank intervene?
Russia belongs to the category of states that thrive thanks to raw materials. A huge amount of oil products is exported, while a huge amount of consumer-oriented goods are imported into the country. For many, a high ruble exchange rate against the US dollar may seem like a big advantage. People are guided by the fact that you can travel the world at minimal cost, since you can buy a lot of dollars for a small amount of rubles. There is a second side to the coin. Companies involved in the export of raw materials negatively relate to the high rate. The problem is that oil is sold for inexpensive dollars, but the purchase of raw materials and remuneration of employees is carried out in expensive rubles. The dependence of the country's budget on the oil and gas sector leads to insufficient budget with a very high exchange rate of the national currency. To stabilize the ruble and eliminate the likelihood of a budget deficit, the government is implementing a procedure such as intervention in the foreign exchange market.
Actual calculations: why depreciate the ruble
Consider, for example, the negative impact of the expensive ruble on the activities of oil and gas companies. We will discuss a situation where the cost of oil will be equal to $ 1, 000. The total costs of the enterprise (again, for example) are about 20 thousand rubles. When the dollar will cost 25 rubles, the company's net profit per ton of oil will be about 5 thousand rubles. If the dollar will cost 30 rubles, then the profit will be equal to 10 thousand rubles. It is calculated as follows:
Ruble exchange rate x Cost of a ton of oil - Costs = Net profit
Such calculations in a general format are used in the construction of the economic plan of the state. The Central Bank intervention in the foreign exchange market is carried out in order to prevent a strong appreciation of the domestic currency, which may lead to the inexpediency of oil development.
Actual calculations: why maintain the ruble exchange rate
An unacceptable situation is formed in the market even when the ruble is excessively weakened. We will analyze this situation with a specific example. Suppose that goods that are imported into the country are equal to one dollar. In a situation where the dollar exchange rate is equal to 20 rubles, goods in the store will also cost 20 rubles, plus negligible costs. When the dollar rises to 30 rubles, the value of imported goods will also increase. As a result, such a concept as inflation will be formed. Jumps in inflation do not benefit the country, which depends on imported goods. Interventions by the Central Bank in the foreign exchange market in this situation will be aimed at buying the national currency for foreign in order to increase demand for it.
Features of the intervention
A massive purchase or sale of currency is the intervention of the ruble. What is the technical implementation of the procedure, we will try to consider gradually. The procedure is organized and conducted by the Central Bank of the Russian Federation. When a real intervention is planned, the Central Bank informs about the planned manipulations with the currency in advance. This approach is called verbal intervention. The message of the Central Bank causes a certain reaction of participants in the foreign exchange market. It may happen that a message about the purchase or sale of currency will significantly reduce the expenditure of Central Bank funds for manipulation. Intervention data can automatically stimulate a rise or fall in demand for the national currency. Some states practice verbal intervention in order to influence the exchange rate of the national currency. The situation in the foreign exchange market could change dramatically if an influential head of the Central Bank hints about future events.
Types of Interventions
There are several formats in which ruble intervention can be carried out. What is it and what are the variations of the procedure, try to find out below.
- Verbal intervention (fictitious). The currency market can be affected not only by the CBR's foreign exchange interventions, but also by rumors that their implementation is planned for the near future.
- Real intervention. The operation is conducted in an open format. After its completion, the media publishes information on how much money was needed to carry it out. Quite often, intervention in the foreign exchange market can be carried out with the participation of not one but several states. This situation is typical for those cases when several countries are interested in changing the exchange rate.
It is worth noting that verbal intervention is much more widespread than the real version of the process. This is primarily due to the fact that unexpected information always causes a powerful reaction of market participants.
Directional Interventions
Intervention can be classified according to direction:
- Behind the market. This format of intervention reinforces a market movement that has already taken shape. Manipulation of the government only reinforces trends.
- Against the market. This procedure is aimed at restoring the national currency to the previous rate. That is, the Central Bank will act against an existing and established trend within the market. Unfortunately, attempts by central banks to reverse the direction of price movement do not always succeed.
What is needed for a successful intervention?
Regulation of the foreign exchange market ends with success only if several conditions are met. We can talk about the presence of the following factors:
- A high level of confidence of participants in the foreign exchange market in the long-term policy of the Central Bank.
- Significant changes in the economic indicators of the fundamental type.
- The presence of a sufficient amount of financial reserves at the Central Bank.
Studying a phenomenon such as the intervention of the ruble (which is already discussed above), it is worth mentioning its use not only with the aim of adjusting the exchange rate. The procedure is used to control market volatility, to maintain the liquidity level of a national unit, to reduce the rate of change in its price, and to accumulate a reserve of the Central Bank of the Russian Federation.
What is happening with the Central Bank today and why has it ceased to control the ruble?
As a result of the catastrophic decline in value and tough sanctions by the EU, the foreign exchange interventions of the Bank of Russia ceased to bring the expected effect. It turns out that the global consumption of gold reserves was wasted. To preserve state savings, the government decided to release the national currency in free float. This suggests that the purchase and sale price of the Russian ruble will depend solely on actual market demand and supply.
