Problem of ruble volatility in new conditions cannot be solved with old methods, Chinese model needed - Reshetnikov
MOSCOW. Sept 25 (Interfax) - The problem of high ruble volatility and inflation cannot be solved only with the key interest rate or by resorting to standard methods of currency control, so it is necessary to study the Chinese model, where the yuan market is divided into internal and external, and to implement a similar approach in Russia while maintaining a single exchange rate for the ruble, Economic Development Minister Maxim Reshetnikov said.
Simply imposing mandatory sales of forex earnings by exports will also not solve the problem, as such sales are already at a high level, he said.
"About the situation on the forex market. We are now monitoring fairly closely about 42 of our major entities for sales of forex earnings, together with the Central Bank, of course. The level of forex sales is fairly high, and this criterion of 80% that everyone is naming, we're exceeding it. For the past five or six months, we've had about 85% of forex revenue returning and being sold," Reshetnikov said at a meeting of the Federation Council's Economic Policy Committee when asked how to reduce the volatility of the ruble and its impact on inflation.
"The situation is due to something else, that we have 35% returning in rubles. We've been active, after all, and remain in favor of switching trade to national currencies. So exporters are actively taking these rubles and returning. The question is where and how they take them, and what kind of market has formed of essentially offshore rubles that are circulating abroad. This is the issue that we are sorting out together with the Central Bank. And one must understand that essentially borrowing is taking place here. We have many entities, not just exporters, trading houses and so on borrowing rubles here and transferring them, so exchange transactions essentially happen there and then the rubles return here," Reshetnikov said.
"The situation is far more complex than just bringing back mandatory sale of forex earnings or not, because bringing it back in its previous form will do little, it will then be necessary to dictate the mandatory return of specifically forex here. Then the question arises of why did we switch all trade to rubles? The matter here is fairly complex. In our view, we need to probably do something similar to, say, the Chinese model, where there is a kind of membrane between the domestic ruble market and the foreign ruble market," Reshetnikov said.
"But this is exclusively our position, we're discussing it with the Central Bank. Right now, as you know, we don't have any restrictions at all, for example on transferring rubles abroad, neither for individuals nor for legal entities. The procedures are fairly simple. As a result, we will have increasingly more rubles there that will play against, let's say, be involved in forex games against the ruble," Reshetnikov said.
"The situation is complicated. We are primarily waiting for proposals from the Central Bank here, because if we don't do anything and only rely on the toolbox that we have, foremost regulation of the key rate, we will have the real sector of the economy held hostage and the very same supply-side economy. Because we will be constantly playing this interest rate against forex speculators and as a result hurt investment lending, which is what we're seeing now. Therefore, one cannot solve a complex problem with just one instrument, the toolbox must be more multifaceted and richer and it needs to be created fairly quickly. This is also our request to the Central Bank and the Finance Ministry," Reshetnikov said.
Asked by senators about what he meant by a "membrane" and whether this means that the "internal exchange rate will be determined not by the Central Bank and the external one by the market," he said that this is "not a question of two rates at all."
"Two rates is an extremely harmful phenomenon. We are opposed to this and here we're of the same position as the Central Bank," Reshetnikov said.
"But at least at the initial stage we must establish precise monitoring and a precise understanding of how many rubles we have circulating abroad, how they're getting there," he said. "Because right now we do not fully have this monitoring and we are also asking our colleagues from the Central Bank to build this system."
"And then we need to understand to what extent these flows are intensifying, and the extent to which the risk for the currency exchange rate is growing accordingly, because the more rubles there are there, the less forex will come here, while our importers are buying forex here to cover imports. And this is also compounded by the imbalance of currencies, because our imports are still in large part in dollars and euros, while inflows are increasingly in yuan and the currencies of, let's say, third countries," Reshetnikov said.
"And all this creates strong pressure, although, of course, arbitrage exists, but arbitrage also costs something, and amid sanctions its cost is fairly substantial. So the situation is fairly complicated, not all issues here can be discussed openly. But nonetheless we need to build out this system," Reshetnikov said, summing up his ministry's views on ways to solve the problem of the ruble's volatility and its discussions with the Central Bank.