Russian Widens Floating Corridor, Strengthening Rouble

Sources:
WSJ: Ruble Hits 2-Year High Against Dollar
Bloomberg: Ruble Moving to Free Float Shows Emerging Inflation Concern: Russia Credit
The Financial: Russia's Cbank Widens Floating Corridor for Bi-Currency Basket to 5 Rbls
FT (blog): Russia: The Rouble Rises

Russia took measures this week that strengthen the rouble, help fight inflation, and bring stability to the central bank’s interest rates. Russia moved one step closer to a free-floating rouble by widening the “floating corridor.” Trading has shifted from 33.0-37.0 roubles against a euro/dollar basket, to 32.45-37.45, which increased the corridor from 4 to 5 roubles. First Deputy Central Bank Chairman Alexei Ulyukayev stated Tuesday that “the ruble is more likely to strengthen than weaken in the short term.” By Wednesday, his statement was confirmed as the rouble strengthened 1% against the euro/dollar basket. Morgan Stanley commented, "This is a bullish sign for the ruble, as it suggests that the central bank has increased its tolerance for ruble appreciation and will only be intervening in the market at stronger ruble levels than before."

However, the fiscal policies in Russia did not alone strengthen the rouble. Unrest in the Middle East also caused oil prices to rise, and since most of the oil production in Russia is state-owned, the profits flow directly to the government coffers. When the floating corridor was widened, the increased oil profits helped the rouble strengthen.

One of the reasons for the adjustment to Russia’s currency may be political. Russia is coming up on its 2012 presidential elections and either potential candidate currently in positions of leadership, Medvedev or Putin, would benefit from stability in the financial sector and a hold on inflation. Russia raised interest rates for the first time since 2008 and the currency is at its strongest since October of that year. The market is nowhere near its 2008 highs, however, with the currency still 20% lower than its peak prior to the global financial crisis. Furthermore, inflation had been running at a 9.7% annual rate before the widening of the corridor due to a crushing drought last summer. Thus, any positive moves to curb inflation have strong political benefits. Strengthening domestic currency benefits consumers by lowering the prices of imported goods, giving consumers more buying power and more confidence in the economy. The increased oil profits can support an increase in government programs that will also boost the political reputations of the candidates currently in power.