Bank of Russia Says to Rebuild Reserves After Hitting Price Goal

(Bloomberg) -- Russia’s central bank has grown so focused on price growth that it’s making a resumption of foreign-currency purchases for reserves conditional on meeting its inflation target, according to the head of its monetary policy department.

The chase after its 4 percent goal for inflation has already taken precedence for rate setters as they’ve kept monetary policy tight through a recession. The central bank, which in 2015 announced a goal of boosting reserves to $500 billion in the long term, hasn’t bought foreign currency for more than a year.

“The main indicator the central bank will watch when making a decision to replenish reserves is the attainability of the inflation target,” Igor Dmitriev said in an interview in Moscow. In addition, “there should certainly be some ‘excessive’ supply of dollars on the market so that we can buy without any significant impact in general on the foreign-exchange market, without doing harm to achieving the target for inflation and keeping it at that level.”

By linking its return into the currency market with inflation, the central bank is signaling it’s unlikely to act to stem gains in the ruble after its strength this year set off alarms among government officials concerned that it makes exports less competitive. The central bank hasn’t bought foreign currency for more than a year to avoid compromising its free float, allowing the market to set the exchange rate since late 2014 and pledging to avoid interventions unless the ruble’s swings threaten financial stability. 

Weakness, Volatility

After burning through about a fifth of its international reserves to prop up the ruble during a crisis in 2014, the Bank of Russia bought about $10 billion between mid-May and late July 2015 before suspending purchases after a bout of ruble weakness and a spike in volatility. The Russian currency has added to its best-ever year in 2016 with a gain of almost 5 percent against the dollar in 2017.

The central bank’s stockpile was at $397.3 billion at the end of February, growing for two months but still down a third from its 2008 peak. Dmitriev said the plans to rebuild reserves are “independent” of foreign-currency purchases by the Finance Ministry under a different program to help soak up excess oil revenue.

Policy makers have said they will examine the possibility of resuming foreign-currency purchases if conditions improve from its baseline scenario, which assumes oil will stay near $40 a barrel. Russia’s Urals export blend usually trades at a discount to Brent crude, which was near $52 in London on Thursday.

International reserves at $500 billion are “appropriate for the stable functioning of the Russian economy in an unfavorable foreign economic environment and international trade and financial sanctions,” the central bank said in its policy guidelines for 2017-2019.

--With assistance from Anna Andrianova

To contact the reporters on this story: Olga Tanas in Moscow at otanas@bloomberg.net, Artyom Danielyan in Moscow at adanielyan@bloomberg.net.

To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Paul Abelsky