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Since the end of communism in 1991, Russia has managed its foreign-exchange rate through various policies as a way to prevent sharp swings in the ruble.

As early as today, the central bank likely will abandon a system that requires the currency to trade within a fixed trading band, after spending $68 billion of international reserves this year in an unsuccessful bid to stem the rubles decline, according to Commerzbank AG and Goldman Sachs Group Inc. Such a step would put Russia as close as its ever been to a free-floating exchange rate, a goal the central bank has pledged to accomplish by next year.

Q: What is the central bank likely to do?

A: It may scrap an existing trading band and say it will conduct discretionary currency interventions, according to Commerzbank and Goldman Sachs.

That would make interventions less predictable than the current system, where the central bank automatically intervenes to defend the ruble once it reaches the weak end of its trading band, currently between 39.2 and 48.2 against a basket of euros and dollars. Once the central bank spends $350 million supporting the currency, it moves the band by 5 kopeks. The process is repeated each time the currency falls by 5 kopeks.

Since Russia may continue buying and selling foreign currencies, it is still not a fully free-floating system, which requires the exchange rate to be determined by the market without central bank intervention. Removing the band gives the exchange rate more flexibility and paves the way for the central bank to stop intervention once the ruble stabilizes.

Q: Why would they change the currency policy?

A: The current intervention policy has failed to shore up the ruble, with the currency weakening to record lows repeatedly since September. It has also cut the nations gold and foreign-exchange reserves to a four-year low of $439.1 billion.

Removing the band discourages speculative wagers on a weakening ruble because it makes central bank intervention less predictable and gives policy makers more room to carry out interventions large enough to support the currency.

The change would likely be more effective and significantly less costly than a large policy rate hike, Goldman Sachs analysts Clemens Grafe and Andrew Matheny wrote in a note yesterday.

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