The decision follows closely in the footsteps of a series of changes in FX policy that the regulator has introduced since pressure on RUB subsided at the start of September. The liquidity drain through the interventions channel was of concern for the regulator as it interfered with the policy transmission, thus reducing the efficiency of the regulators’ liquidity provision/management operations. Following this decision, RUB adjustment towards potential shifts in the market supply-demand balance are likely to become faster and cost less FX reserves (i.e. liquidity). For instance, assuming the new market equilibrium for RUBBASK shifts to 38.0, it would now cost almost half the amount of reserves (USD 6.9bn vs. USD 12bn previously) and time (35 trading days vs. 60 days) for the intervention-neutral zone to move to this level. Greater RUB flexibility is likely to allow the regulator to become more comfortable providing additional liquidity via non-standard refinancing vehicles, as well as changing policy rates if judged appropriate.
From the fundamental standpoint, the cutback in targeted interventions implies that the regulator has reassessed the equilibrium exchange rate. This is not a surprise, given the underlying deterioration in the balance of payments observed since the start of 2012. We believe this deterioration is likely to continue (but at a moderate pace) next year, putting RUB under further pressure. That said, favourable current account seasonality and benign risk sentiment will, in our view, support RUB over the next couple of quarters and we maintain our yearend forecast of 37.0.