Central Bank of Russia Tries to Squeeze Cash and Dry FX Liquidity to Fight off Speculators

The Central Bank of Russia (CBR) has just announced that it is limiting ruble Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term by cutting the size of its FX swap offers to banks to a maximum of only $2 billion a day until the end of November. The CBR explained that it had decided to limit the allotment amount of the ruble liquidity using FX Swaps Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Read this Term starting from tomorrow, in order "to stabilize the FX market conditions."

This decision was taken in addition to the earlier measures, including abandoning regular FX interventions, as well as an introduction of reverse transactions to provide foreign currency. The CBR stated: "Thereafter the Bank of Russia will assess the allotment amount of ruble liquidity using FX swaps taking into account FX market conditions."

Yesterday, the CBR Governor, Elvira Nabiullina, said she would limit ruble funding in order to squeeze speculators gambling against the currency. The move came after the bank had decided to stop selling $350 million daily with a view to support the ruble when it reached and crossed the lower limit of its trading band.

The CBR uses overnight FX swaps for limiting money market interest rate fluctuations. According to the bank's estimates, the newly established limit will not prevent FX swaps from fulfilling its role, enabling it to maintain control over market interest rates. This however, increases the risk that Russian banks and firms will not be able to finance all of their activities, further hurting the country's economy.

The Russian position, as stated by President Putin yesterday, is that the ruble’s sharp drop over the last month is “absolutely not related to fundamental economic reasons.” CBR Governor Nabiullina explained the moves in the same line as a plan "to prevent games on the currency market." Time will soon tell if the official Russian "games" with the FX market are able to sustain the ruble without causing too much pain to the real economy.