The CBR/ Minfin duo suspends FX interventions

RUSSIA ECONOMICS - In Brief 24 Jan 2022 by Alexander Kudrin
Today Central bank announced it is suspending daily FX purchases on the open market. These interventions are stipulated by the fiscal rule. Geopolitical tensions created significant pressure over the Russian assets since the start of the year. Since the beginning of the year the 5Y CDS contracts have widened from 125 to 210 bps, the equity market dropped by almost 20% in USD terms, OFZ yield increased by 130-150 bps, while the exchange rate moved from RUB/USD 74.5 to almost 79.5. In this environment, the authorities decided to minimize their interventions on the financial markets. Last week the Finance Ministry canceled the primary OFZ auction, today CBR stops FX interventions. Both steps will have only a minor impact on the Government’s financials as the budget is expected to be in surplus, while the aggregate amount of the National Wealth Fund is already exceeded $185 bln.The decision by the Government and CBR is a more or less traditional response to increased market instability. The same reaction was seen last time in 2020, during the initial COVID-19 shock. It’s premature to judge when FX interventions and OFZ placements may resume as this depends on a number of various factors. We don’t rule out that pause may take even several months - especially if the geopolitical situation deteriorates considerably (for whatever reason). Moreover, if pressure on the exchange rate increases further, the regulator may even start selling FX (but at this stage, the likelihood of such a scenario is not very high). In any case, authorities will try to use all the available tools to maintain the relative stability of the financial system.Evgeny GavrilenkovAlexander Kudrin

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