Ruble strengthening largely on drop in imports due to sanctions - CBR

MOSCOW. May 12 (Interfax) - The main factor driving currency exchange rates in an economy with restrictions on the movement of capital, which Russia now is, is the trade balance, while the impact of the financial account decreases significantly, the Central Bank of Russia (CBR) said in its report on monetary policy.

"This, among other things, means that the strengthening of the ruble that has been seen recently is to a significant degree related to the lower volume of imports amid sanctions and foreign companies' restrictions on shipment of goods to Russia and, consequently, importers' lower demand for foreign currency," the CBR said.

The ruble fell to record lows after the imposition of tough sanctions against Russia at the end of February and beginning of March over the events in Ukraine, but it has long since recovered its losses. The U.S. dollar was at 67.20 rubles as of 7:00 p.m. Moscow time on May 11, while the euro was at 70.50 rubles.

The ruble still has a floating exchange rate, but the set of factors that determine its dynamics has changed, the CBR said.

"In an open economy (economy in which there are no restrictions on movement of capital), the national currency's exchange rate is determined by two accounts of the balance of payments - the current account and financial account. The active participation of national and foreign financial institutions on the currency market makes it possible to smooth out seasonal exchange rate fluctuations. The existence of additional mechanisms, such as the fiscal rule, smooth out exchange rate fluctuations related to prices for resources on the world market (for example, oil, copper and others)," the CBR said.

Monetary policy continues to affect the ruble's exchange rate even after the imposition of capital restrictions, but with a longer lag and more indirectly, through the dynamics of demand for imported goods, while demand for financial instruments becomes less important, the CBR said.

In recent weeks the CBR has eased a number of measures of the system of forex restrictions introduced in February-March, such extending the period within which export earnings must be sold from three days to two months. The CBR said in the report that it is easing capital control measures "on the basis of an analysis of risks for financial stability, not the dynamics of the ruble's exchange rate."

The CBR also said that the suspension of the fiscal rule and restrictions on the movement of capital "reduce the ability of financial markets to smooth out exchange rate fluctuations," so the ruble's exchange rate could be "more volatile than in previous periods."