2014-29 How the ruble is managed

The ruble is falling for three reasons

1. sanctions by Western countries related to the aggression in the Ukraine

2. low price of oil

3. strong US dollar.

The exchange rate arrangement in Russia is a dirty float. The exchange rate is allowed to vary within a band relative to a basket of currencies, and the central bank intervenes to keep it within the band. This is not an uncommon arrangement but the details are unusual:

• the band is unusually wide:  ± 12.5% (the current band is, according to the article, to keep the ruble exchange rate between 35.65 and 44.65 rubles per basket (the formulation is odd because the exchange rate is calculated against a basket of currencies, not a single currency). A more typical band is ±1% or ±2.5%
• once the exchange rate approaches a limit of the band, the central bank intervenes - this is a standard procedure. Recently the ruble was weak so the bank would intervene to prop up (increase) its value by buying rubles (i.e. increasing demand for them) and selling foreign currencies. Also standard.
• once the daily intervention reaches a limit ($350 million) the band is moved up by 0.05 ruble (5 kopecks). This mechanical rule is also unusual. 

What does moving the band mean? That the Russian central bank does not try to prevent appreciation or depreciation but does want to prevent rapid changes in the currency. This is a bit similar to what Bank of Canada was doing before 1998.

The intervention reduces the central bank's foreign exchange reserves by $350 million. This is not a big problem since Russia has over $500 billion in reserves

Interesting factoids: 

• there are 169 countries listed on the CIA Factbook comparison of the foreign exchange reserves. The sum of those reserves is almost $13 trillion. The top four countries: China, Japan, Saudi Arabia and Switzerland hold a half of all reserves. 
• The amounts vary from $32 million in Montserrat to 100 000 as much in China. But, per person, Montserrat's reserves are twice bigger.

Here is the exchange rate of the ruble in terms of the basket of currencies (a very simple basket: US dollar has the weight of 0.55 in the basket, Euro has the weight of  0.45):