Central Bank Is Not Ready to Float Ruble

The government will continue to target both the exchange rate and inflation next year because its economy is not ready for a free-floating ruble, according to a Central Bank strategy paper.

In its draft monetary policy guidelines for 2005, the Central Bank targets real effective appreciation of the ruble of 8 percent, up from 7 percent this year. It sees inflation at 6.5 percent to 8.5 percent, down from 10 percent in 2004.

That implies a broadly stable nominal exchange rate for the ruble, which is widely seen as undervalued but whose appreciation the Central Bank has curbed through intervention aimed at maintaining the country's economic competitiveness.

"Russia, with an open and insufficiently diversified economy highly dependent on the external financial and economic climate, is not yet able to move to a freely floating ruble regime," the document said.

The ruble has made good only a fraction of the losses it sustained in the 1998 financial collapse, enabling the economy to maintain rapid rates of growth led by a revival of oil and industrial production.

But the twin-track policy of targeting both the exchange rate and inflation has risks, and the Central Bank said it would continue to prepare the ground for the ruble to float freely, enabling monetary policy to focus on taming inflation.

Other planks of the strategy include tighter banking supervision in the wake of a mini-crisis that has forced eight lenders to close since May, and increased use of existing money market tools to fine-tune banking sector liquidity.

The strategy contains three scenarios: The first assumes an average price of $22.50 per barrel for Urals crude oil export blend, the second a price of $26 and the third a price of $31.

Those scenarios do not tally, however, with the latest three-year outlook released on Monday by the Economic Development and Trade Ministry, which forecasts oil at $28 per barrel and hiked its 2005 inflation outlook to 8-9 percent from 6.5-8.5 percent previously.

Urals crude was trading at $41.54 on Tuesday, as world prices hovered near record highs. That spells a huge revenue windfall for Russia, the world's No. 2 oil exporter, but also creates policy headaches as the authorities print money in their bid to stop the ruble from turning into a petrocurrency. A source said the Central Bank had not received the revised Economic Development and Trade Ministry forecast -- to be used in finalizing the 2005 budget draft -- when it was working on its projections.

Depending on the scenario used by the Central Bank, Russia's oil-fueled balance of payments surplus is seen at $19.7 billion to $40.6 billion in 2005, after a projected $39.1 billion this year.

It also forecasts an increase in foreign exchange and gold reserves of $6 billion to $24.9 billion, compared with a forecast $23 billion gain in 2004.

Foreign exchange reserves have risen due to dollar-buying intervention by the Central Bank, which has in turn boosted the money supply. The Central Bank raised its forecast for money supply growth to 34-38 percent this year from 25 percent.

It forecast growth of demand for money of 20-35 percent next year but, with a reassurance that this would not translate into faster inflation, said the rate of circulation of money should slow.

Net capital outflows are forecast at $4 billion to $6 billion next year, compared with $6.7 billion this year, the Central Bank said. Again, that appears out-of-date after the Economic Development and Trade Ministry recently raised its forecast of capital outflows this year to $8 billion-$12 billion this year.