The foreign currency and gold reserves of the Central Bank of Russia (CBR) gained $2.3bn or 0.6% w/w reaching $394.5bn on the week ending July 29, its highest level in over two years, the regulator said on August 4.

The increase is good news for the Kremlin as has been dipping into its reserve funds to finance the federal budget deficit leading some to fear that Russia will burn through all its rainy day fund in the next two years. However, the situation there is improving too after the regulator said there were no draw downs from the reserve fund at all in July. 

The increase in hard currency reserves was attributed to positive currency revaluation by the CBR, the FX currency part of the reserves being the main mover of the indicator throughout 2016. In addition, resident banks returned foreign exchange to the regulator under Repo operations.

Since March, the FX/gold reserves had posted continuous monthly growth, advancing by over $20bn ytd and reaching their highest value since December 2014. In May, the reserves gained 8.7% y/y through June 1, 2015 to $387.7bn, according to the regulator.

However, the growth flattened out in June and July and the weekly FX/gold reserves indicators have fluctuated at around $393bn-$395bn.

After dropping by over a third from a post 2008 peak of $500bn, the decline of the reserves was stopped by the much-praised CBR's decision to free float the ruble exchange rate in November 2014. This, coupled with target support for forex liquidity in the banking sector, eased the pressure on reserves to intervene with the falling currency exchange rates.

The CBR has recently been under pressure to stand behind the flexible exchange rate policy after Kremlin officials repeatedly expressed concerns over the strengthening ruble. But the regulator has stuck by its inflation targetting goal and refrained from intervening in the exchange markets to weaken the ruble, but at the cost of burning up some of its reserves. The upshot is Russia's central bank has been dubbed by some as the "most orthodox central bank in Europe."

Both President Vladimir Putin and his economic advisor Andrei Belousov urged financial authorities to curb steady ruble growth that is undermining the country's fiscal position, competitiveness of export-oriented industries, and import substitution efforts.

"The central bank does not plan to give up the floating exchange rate and to otherwise influence the ruble exchange rate," the CBR press service told Reuters on July 21, adding that the floating rate has proved its effectiveness as a stabilising instrument and a mechanism for balancing the interests economic agents, including importers and exporters.

Both Russia's Finance Ministry and Ministry of Economic Development previously came out in support of the CBR's policy of maintaining the floating ruble exchange rate amid concerns about the recent strengthening of the currency.

"I support the [central] bank of Russia's rationale of the market determining the currency exchange rate," Minister of Economic Development Alexei Ulyukayev told journalists on July 25, noting that any movement of the currency brings both positive and negative effects for various sectors of the economy.