MOSCOW — With the Russian ruble in a nosedive under the pressure of Western sanctions and slumping oil prices, the country's central bank decided Monday to freely float the currency in markets and stop regularly spending billions in a vain attempt to stem its fall.
The bank has been burning through its $400 billion in reserves to soften the drop in the ruble, which has lost about half its value since the start of the year as investors pulled money out of Russia and the economy headed toward recession. It spent $30 billion last month alone — an unsustainable rate.
On Monday, the central bank said it would let the market decide what value to give the ruble, which touched a record low of above 48 to the dollar on Friday. It also warned, however, that it would be ready to intervene if necessary to maintain financial stability.
A free float could see the ruble depreciate further in the longer term, stoking inflation and other economic problems for Russians. But investors welcomed the central bank's move as a necessary step protect the nation's hard currency reserves and curb market speculation.
As a result, the ruble strengthened sharply on the news, trading up 3.6 percent at around 45 rubles a dollar in midday trading.
The central bank will stop setting daily limits for the ruble's fluctuations and will not have any obligation to intervene regularly in markets to support the currency. However, Central Bank Chief Elvira Nabiullina said the regulator will "intervene in the market at any moment in the amount necessary to counter speculative demand."
Speaking in Beijing, where he attended the Asia-Pacific Economic Cooperation summit, Russian President Vladimir Putin voiced confidence that the central bank's move will help stabilize the ruble.
"We have seen speculative fluctuations of the rate, but I think it will end soon in the face of action taken by the central bank in response to action by speculators," he said.
The central bank has been eating through its hard currency reserves to prop up the ruble, spending $30 billion last month alone. It also has steadily raised its base interest rate from 5.5 percent to 9.5 percent last month to entice investors with higher returns. The ruble kept falling.
Observers said Russian banks were able to earn easy profits by taking loans from the central bank and buying dollars in the currency markets, a strategy that helped drive the ruble down further.
Nabiullina said the central bank will introduce restrictions on the amount of loans offered to financial institutions to ease pressure on the ruble.
"We will temporary limit liquidity in rubles, because it's being used not only for financing the economy but also for currency market speculations," she said.
Market watchers said the ruble's trading band encouraged investors to test the limits set by the central bank.
"It became quite clear that corridor was no longer helping prevent the ruble's plunge," MDM bank chairman Oleg Vyugin, a former deputy central bank chief, said in comments carried by the Tass news agency. "Its predictability made a lot of harm."
Finance Minister Anton Siluanov said the regulator should have made the move earlier. "The decision is a bit belated," he said, according to the Interfax news agency. "When the ruble came under pressure, it was unnecessary to maintain the currency corridor and sell hard currency reserves," he said.
Siluanov argued that the ruble had been driven down by speculators, adding that market forces will help it rebound.
However, slumping oil prices and uncertainty over when the U.S. and European Union sanctions for Russia's action in Ukraine will likely keep pressure on the ruble.
The central bank on Monday revised up its estimates for how much money will be pulled out of Russia this year, from $90 billion to $128 billion. It predicted zero economic growth next year.