BOFIT Viikkokatsaus / BOFIT Weekly 2017/05

The finance ministry announced that the background is refraining from using extra oil & gas tax revenues (i.e. income that results from Urals-grade crude exceeding the budget assumption price of $40 a barrel) for budget spending this year. Instead, the excess oil & gas tax income is placed in the Reserve Fund. The current plan is to keep on in this manner until the law can be amended to launch a new budget rule.

The assets in the Reserve Fund and practically all liquid assets of the National Welfare Fund have long been invested in liquid foreign-currency assets such as treasuries. The finance ministry now begins to specify monthly forex purchase amounts needed based on how much the oil price assumption of the federal budget approved in December is exceeded, as well as how much the dollar-ruble exchange rate differs from the assumption used in the budget. Deviations to the other direction would lead to selling currency. The amounts of monthly purchases (or sales) are announced beforehand, and are carried out by the CBR on the Russian forex market. The currency operations will be conducted in the course of each day from this month, and some sources report this policy is operational since the early days of the month.

The CBR said the ruble's floating exchange rate regime will remain in place, and that the exchange rate will not be steered through forex interventions. The inflation target set at end-2017 will remain in place. The CBR noted the new purchases of forex will have very little impact on banks' liquidity.

Banks and observers estimate that the amount of the new forex purchases will be small relative to Russia's total forex market trade volumes. Even so, the new measures have baffled many. Authorities are thought to contain the ruble's appreciation to assure the budget gets more oil & gas tax revenues (the taxes are mostly denominated in dollars). A weaker rouble would add to inflation and inflation expectations. It has been noted that the official forex market actions and the uncertainty that emerged around them among market participants could cause some shift from ruble-denominated assets to forex-denominated assets, increase speculation in the currency markets, and weaken the ruble. Some have also wondered why the additional oil & gas tax budget revenues would simply not be channelled to the budget and less money taken out of the Reserve Fund than planned in the approved budget.