Russian Government Mulls Early Return to Forex Market After Rouble Firms, Finance Minister Says 

Russian government mulls early return to forex market after rouble firms, finance minister says

Russian Government Considers Forex Market Re-entry Amid Rouble Strength

By Elena Fabrichnaya and Gleb Bryanski

Background: Rouble Rally and Oil Prices

MOSCOW, April 16 (Reuters) - The Russian government is considering an early return to the foreign currency market after the rouble rallied this month thanks to higher oil prices, Finance Minister Anton Siluanov said on Thursday, in a move welcomed by businesses and markets. 

Faced with falling oil revenues at the start of the year that threatened to deplete its fiscal reserve fund amid the costly military action in Ukraine, the government in March suspended its forex transactions until July.

Russia's Budget Rule and Forex Transactions

Under Russia's budget rule, the government buys foreign currency for the fund with tax revenues collected when oil prices exceed a certain cut-off point, currently set at $59 per barrel. If oil trades below that cut-off price, the government sells foreign currency from the fund to cover the budget deficit.

When oil prices spiked in March due to the Iran war, incoming forex revenues saw the rouble firm 8% against the U.S. dollar in April. That prompted many analysts and businesses to question the logic of the forex transactions pause under the changed circumstances.  

Government Statements and Market Reactions

Finance Minister Siluanov's Remarks

"The government will consider this issue. I think it would be possible to resume this discussion now, and I believe the government will make a decision on this part in the near future," Siluanov told a business conference on capital markets in Moscow on Thursday.  

Economic Impacts of a Stronger Rouble

A stronger rouble helps the central bank fight inflation but is negative for economic growth as it eats into exporting firms' profits, forcing them to cut investment, and makes Russian products less competitive.

Putin's Criticism and Growth Outlook

President Vladimir Putin scolded his officials for an economic contraction in the first two months of the year at a meeting on April 15. Russian economic growth is seen at around 1% this year. 

STRONG ROUBLE TO STAY

Forex Transactions Pause and Market Movements

Siluanov said that the decision to pause was made after the government sold foreign currency worth 500 billion roubles in January and February to cover the deficit.

Without the pause, the government would have sold foreign currency in March too, and bought an equivalent amount in April, he stressed.

The rouble, which strengthened to the highest level against the dollar since May 2023 on April 15 in the over-the-counter market, weakened slightly against the dollar after Siluanov's remarks, according to LSEG data.

The rouble slid against China's yuan, the most traded foreign currency in Russia, by 1% on the Moscow Exchange.  

Analysts' and Economy Minister's Perspectives

"Export revenues are increasing, the Middle East conflict is not ending soon, and commodity prices are high. The rouble is excessively strengthening, and it's time for the regulator to return to balancing the market," said Sofya Donets from T-Bank.

However, Economy Minister Maxim Reshetnikov told the same conference that the rouble would remain strong for years, posing a major challenge to the government's drive for a structural change in the economy. 

Capital Controls and Currency Market Outlook

He pointed to Russia's massive capital restrictions, including special accounts for cash generated by foreign companies, which, under normal circumstances, would have been transferred out of the country, pushing the rouble weaker. 

"The presence of such an overhang in our currency market suggests that any weakening of the exchange rate will likely be dampened by this overhang," Reshetnikov said.  

(Additional reporting by Darya Korsunskaya, Anastasia Lyrchikova; Writing by Gleb Bryanski; Editing by Andrew Osborn and Janane Venkatraman)