25 Sep 2023 18:54

Russian Central Bank skeptical of potential of forex market "membranes," segmentation fraught with risks

MOSCOW. Sept 25 (Interfax) - Segmentation of the foreign exchange market, including with the use of so-called membranes, will lead to multiple exchange rates and negative consequences for the financial market as a whole, the Bank of Russia said.

"Restrictions on the movement of capital are appropriate only as short-term response measures to maintain the smooth operation of the financial system in the face of significant risks to financial stability. The Bank of Russia believes that these restrictions cannot be an effective tool for long-term influence on the market level of the exchange rate," Interfax was told by the Central Bank press service.

Constant restrictions on the movement of capital complicate foreign economic activity, especially now when companies are forced to build new supply chains and new payment routes, the regulator emphasized.

"In addition, these restrictions make it difficult to adjust the exchange rate to changes in external conditions and, accordingly, can slow down the economy's ability to adapt to these changes," the Bank of Russia noted.

The head of the Ministry of Economic Development of the Russian Federation, Maxim Reshetnikov, proposed solving the problem of high ruble volatility and inflation by studying the Chinese experience, where the yuan market is divided into internal and external, and implementing our own version of that system. "We probably need to implement some kind of, let's say, version of the Chinese model, when there is still some kind of "membrane" between the domestic ruble market and the external ruble market," Reshetnikov said, voicing the ministry's proposal in the Federation Council on Monday. He said that the Ministry of Economic Development is discussing this position with the Central Bank.

The minister said that a single ruble exchange rate should be maintained. "Two rates are an extremely harmful phenomenon. We are against this, and here we share the position of the Central Bank," he said.

"The situation is complicated. First of all, we are waiting for proposals from the Central Bank, because if we do nothing and only rely on the tools, first and foremost, regulation of the key rate, that we have, then we will keep the real sector of the economy hostage; the very economics of supply. Because we will constantly be playing with this interest rate against currency speculators, the result will affect investment lending, which is what we are seeing now. This is a complex problem that cannot be solved with just one tool. The toolkit must be more versatile and more diverse, and it needs to be created quickly. This is also our request to the Central Bank and the Ministry of Finance," the minister said.