Russia's central bank effectively abandoned the trading corridor for the ruble on Wednesday, halting big interventions that had seen it spend billions a day to prop up a currency driven lower by sanctions and falling oil prices.
The bank announced it would limit daily interventions to just $350 million a day, saying this would mean the currency's price would now largely be set by the market, although it stopped short of formally abolishing the trading corridor.
The ruble, which has already lost almost a quarter of its value since the middle of this year, promptly fell by around 1.5 percent against the dollar on Wednesday.
Plunging oil prices and Western sanctions over the Ukraine crisis have shriveled Russia's exports and investment inflows, driving the currency down.
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Moscow had already officially planned to float its currency at the end of this year, but now appears to have been forced by its worsening finances to unmoor the currency sooner than planned.
Russia still has some $440 billion in reserves, having spent around $70 billion this year, but with great uncertainty over how long external economic stresses will last it is reluctant to spend them at the hectic pace of recent weeks.
It spent $29 billion last month, often spending around 2.5 billion a day.
A rapid fall in the ruble could be a political setback for President Vladimir Putin, who remains hugely popular despite the imposition of Western sanctions over his policy of seizing territory from neighboring Ukraine and supporting rebels there.
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Until this year, a stable rouble exchange rate was one of the signature achievements of Putin's 14 years in power, in a country where memories are still raw of catastrophic hyperinflation and currency collapse in the 1990s.
On Friday, the bank announced an unexpectedly large 150 basis point increase in its main lending rate in an attempt to support the ruble and control high inflation.
Although the bank said on Wednesday it would still formally retain the trading corridor, economists said the $350 million limit on daily interventions made the corridor meaningless.
"The move is an effective move to a free float from now on," Vladimir Osakovsky, chief Russia economist at Bank of America Merrill Lynch.
ING economist Dmitry Polevoy said: "By doing this the central bank makes the current corridor nearly irrelevant for the exchange rate dynamics of the ruble."
"Clearly the idea is that the upper boundary of the corridor is not the cap on the exchange rate, so in reality it can move freely and therefore it's flexible."
In the afternoon, the ruble was down 1.5 percent to 44.26 against the dollar and down 1.5 percent to 55.32 against the euro, already pushing it outside the most recent corridor, announced on Friday.
In its statement, the bank said the move to limit daily interventions would significantly increase the flexibility of the exchange rate, meaning the rate will now largely be determined be market factors.
The bank would keep the ruble's corridor against a dollar-euro basket for now and spend up to $350 million a day when the ruble is outside the corridor.
Commenting later on Wednesday, the bank's Deputy Governor Ksenia Yudayeva said that the bank had not abolished the corridor to avoid "a serious shock" to the market.
ING's Polevoy said that the decision to leave the corridor in place, even though it now has limited relevance, may be aimed at reassuring the general population rather than markets.
He also said the continued small interventions of $350 million a day could add up to around $14 billion by year-end, providing an injection of some foreign exchange into the market that would be welcome given heavy demand for dollars.
New regime
The central bank has been planning for years to float the ruble by the beginning of 2015 as part of its shift to a monetary regime that would target inflation rather than the exchange rate.
Most economists endorse the float, arguing that a flexible currency shields Russia from external shocks such as a fall in the price of oil, Russia's main export. But the bank had always intended to carefully manage the transition, rather than have its hand forced by a currency fall draining its reserves.
Global prices for oil have fallen by almost a quarter since the summer. The plunge has coincided with the imposition of financial sanctions by Western governments against major Russian companies, limiting their access to foreign currency.
By artificially slowing the rouble's decline, critics argued, the central bank's multi-billion dollar daily interventions encouraged speculation against it.
"This is a step in the right direction," Neil Shearing, chief emerging market economist at Capital Economics, said in a note. "The ruble is likely to weaken further over the coming days, but should find a floor more quickly than would have been the case under the old framework."
The bank said that it was ready to carry out additional interventions in the event of a threat to financial stability. Analysts said that such ad hoc interventions are unlikely barring more serious financial turmoil. However, uncertainty over the frequency and size of these one-off interventions could deter speculators.
In a move to ensure that Russian banks have access to foreign currency despite sanctions, the central bank also said on Wednesday that it would extend a program to provide short and medium term foreign currency financing to banks, through agreements known as repo loans.
Such loans would now be offered for up to a year and at better interest rates than instruments launched last month, which were offered only for up to 28 days. The previous loans saw little demand from banks dissuaded by unattractive borrowing terms.
The central bank said that the interest rate on all its forex repos would now be set at 1.5 percentage points above the London Interbank Rate (LIBOR), lower than previously announced.
Analysts said that the new terms and maturity would encourage more banks to take up the new repo facilities, but there were mixed views on how significant they would be.
Banks may be reluctant to use the repos as a way of financing heavy foreign debt repayments falling due over the coming months, a major factor behind pressure on the ruble.
"The main point of this (instrument) is to create a liquidity window for banks with short-term liquidity mismatches," said Osakovsky. "The main purpose is to remove that concern rather than actually to support the ruble."