Section 2. Monetary and Budgetary Spheres 2.1. Monetary Policy in the Crisis Period 2.1.1. Monetary Market The global financial and economic crisis that burst out in Russia in late 2008 battered primarily the financial sector of the economy. In August, crisis developments on the global financial markets were further aggravated by Russia’s military action in the Southern Ossetia and triggered a sizeable capital outflow from the country. Plus, a slowdown in the largest economies’ growth resulted in a dramatic deterioration of foreign trade conditions for Russia and a subsequent drastic contraction of the nation’s foreign exchange revenues. As a result, Russia’s international reserves began to dwindle rapidly, as the Bank of Russia had to throw them on pegging the Rb. exchange rate. In addition, the appreciation of the USD against the Euro on the global forex market has sent the value of the USD-denominated fraction of the reserves nosedive.
A rapid depletion of the volume of international reserves had been continuing through January 2009 and was the result of the Bank of Russia’s pursuance of the policy of a gradual devaluation of the Rb. It was just the stabilization of prices for energy sources and the end of a sharp phase of the global economic crisis that allowed one to stop the rapid fall of the reserves. Between February and March 2009 the dynamic of international reserves demonstrated its fluctuating nature, with their minimum value reported in mid-March, when they stood at USD 376.1bn vis--vis a peak of USD 597.5bn back in the early August 2008. So, the gradual devaluation cost the bank of Russia roughly as much as one-third of the nation’s international reserves (with account of the fact that the fall in the reserves was partly fueled by the noted appreciation of the USD vs. the Euro). The policy de facto enabled economic agents (primarily, commercial banks) to cut it fine with betting on a predictable exchange rate dynamic. It can be suggested that had the authorities opted for a one-time devaluation of the Rb. exchange rate to a level of circa Rb. 35/USD, the equilibrium on the forex market would have been secured anyway, but the price for the monetary authorities would have been less.
That said, the gradual nature of depreciation of the Rb. allowed one to somewhat smooth down negative social effects from the process.
With global financial market stabilizing and prices for major Russian exports slightly bouncing back to normality, as early as in May 2009 the volume of the nation’s international reserves was back on track of growth and by November-December accounted already for USD 440bn-plus. So, despite a sizeable contraction of the reserves, their volume remained fairly considerable by international standards (as of December 2009, Russia had the world’s third greatest volume of the reserves after China and Japan). In all likelihood, should oil prices in the medium term remain within the corridor of USD 60-70/bbl or above that, the nation’s international reserves would stabilize or slightly grow.
RUSSIAN ECONOMY IN trends and outlooks Source: the CBR Fig. 1. The Dynamic of the Monetary Base and International Reserves in 2008-The dynamic of money supply over the crisis period also allows singling out several subperiods. As already noted above, in the second half 2008 Russia’s gold and foreign reserves were in decline, as the CBR had to sell forex to keep the Rb. exchange rate buoyant. But a considerable increase in the CBR’s volume of lending to commercial banks (between July and December 2008 the increase in loans credit organizations had received from the CBR accounted for over Rb. 3.3trln), nonetheless, resulted in a slight growth (+2.9%) of the monetary base over the 2nd half 2008. In January 2009, in the conditions of a full-scale capital outflow form the private sector, there took place the most significant contraction of the monetary base over the crisis period (-22.4%). It was fueled by the fall in the volume of cash (-14.5%) in the first place and that of balances of the credit organizations’ corresponding accounts with the CBR (more than twice) due to a USD 40.2bn-worth contraction of Russia’s gold and foreign reserves (Table 2). The CBR partly damped the liquidity outflow from the banking sector in January by boosting up the volume lending to Russian banks. More specifically, in January 2009 alone, the aggregate volume of loans disbursed to the national banking sector surged by Rb. 325.3bn (up 8.8%).
Between February and March 2009, the amount of the monetary base in broad terms has not undergone any substantial changes due to some stabilization on the exchange market and remained at the level of a. Rb. 4.3trln. Between April and December 2009, with the global economy recovering, prices for main Russian exports soaring, and the Rb. rate appreciating, the volume of the monetary base rose at 50.4% against the background of growing budget expenditures. It was the spending of the Reserve Fund’s resources and the CBR’s purchases of foreign exchange that formed main factors contributing to the growth in the monetary base. Specifically, the use of the resources from the Reserve Fund on financing Section Monetary and Budgetary Spheres the budget deficit has increased money supply by more than Rb. 2 trln. Meanwhile, the CBR’s cutting back on the volume of lending to commercial banks helped slightly inhibit the increase of the monetary base.
So, spending the Reserve Fund’s resources in 2009 began to contribute substantially to the growth in money supply. Given that as of January 1, 2009, the aggregate volume of the National Welfare Fund and the Reserve Fund combined accounted for Rb. 6,612.1bn (USD 225.1bn, or 15.9% of GDP) (+ Rb. 2,763bn when compared with January 1, 2008), as of January 1, 2010, the respective value was Rb. 4,599.5bn (USD 152.4bn, or 13.6% of GDP). A rapid increase of budget expenditures may once again fuel an impetuous surge of money supply – by results of December 2009, the monetary base increase rate has already hit 24% and proved to be the most substantial one since December 2003. Meanwhile, the CBR’s capability to sterilize an excessive money supply by virtue of recovery of the earlier extended to commercial banks credits will be smaller than between March and August 2009.
TableDynamics of Monetary Base in Broad Terms between 2008–2009 (as Rb bn) 1.07.2008 1.10.2008 1.01.2009 1.04.2009 1.07.2009 1.10.2009 1.01.Monetary base (in broad 5 422.9 5 317.8 5578.7 4298.8 4967.6 4803.7 6467.terms) including:
Cash in circulation, with 4 077.2 4 285.3 4372.1 3658 3908.1 3869.2 4622.account of credit organizations’ cash balances Commercial organizations’ 592.4 702.9 1027.6 431.7 471.4 545.4 900.corresponding accounts with the CBR Emergency funds 360.3 152.1 29.9 33.3 61.8 153.9 151.Commercial organizations’ 369.3 154 136.6 163.4 508.8 216.9 deposits with the CBR The CBR’s obligations in 23.7 23.5 12.5 12.4 17.5 18.4 283.hands of commercial organizations Source: the CBR An analysis of the change in the structure of assets in the CBR’s balance (see Table 2) allows one to note that in the critical phase of the crisis (between the autumn 2008 and the winter 2009) it was credits and deposits disbursed to Russian credit organizations that demonstrated the highest increase rate. By contrast, capital placed with non-residents was shrinking1. Once between the spring and summer 2009 the global financial market began recovering, the CBR has been gradually shutting off its lending pipe. In parallel with that, the RF Government had found by then its resources drying up, as were the CBR’s accounts. In other words, because of the crisis phenomena, it was the CBR’s operations on refinancing credit institutions that formed the principal source of formation of money supply. This is consistent with the most developed nations’ practice. In the circumstances it is interest rates of the CBR’s credits that gain a far greater role than before, as employing them, the Bank of Russia can exert a substantial influence on the situation in the monetary sphere. Meanwhile, as long as resources were being spent from the Reserve Fund, the money supply in the country was on the rise, and the Bank of Russia precludes it from a further excessive growth by cutting back on the net lending to commercial banks. But its capability to do so is limited, This paper highlights on changes in the Bank of Russia’s international reserve assets.
RUSSIAN ECONOMY IN trends and outlooks while further appropriations from the accounts of the RF Government with the CBR might result in an acceleration of growth rates of money supply, which, in the event of a sharp aggravation of the situation on financial markets in the form of a growing financial instability, could create a downward pressure on the Rb. exchange rate and trigger inflation escalation.
Let us note that the lending fragmentation to credit institutions in the autumn 2008 (in anticipation of a looming devaluation) did not allow one both to solve the problem with liquidity in the banking sector and the problem of lending to the real sector, as at the expense of the defacto predetermined gradual devaluation the CBR has generated very lucrative assets, that is, foreign exchange, that has proved to be more rewarding and less risky than alternative avenues for investment. As a result, once bankers received the CBR’s transfers, the latter were immediately channeled onto the forex market and ultimately back to the reserves-bleeding CBR. So, the gradual devaluation allowed the financial sector to generate extra profits, which mitigated the liquidity crisis in the banking system, albeit, as already noted, it cost the CBR one-third of its international reserve assets and triggered a boom on the forex market.
Table The Balance Sheet of the Bank of Russia in 2008–1.08.2008 1.01.2009 1.12.% assets / % assets / % assets / USDbn. USDbn. USDbn.
liabilities liabilities liabilities Funds placed with non-residents and 13653.9 93.2 12091.1 71.3 12448.2 80,foreign issuers’ securities Loans and deposits 69.2 0.5 3871.3 22.8 1707.7 11.Precious metals 382.2 2.6 450.3 2.7 746.4 4.Securities 442 3.0 441 2.6 459.7 3.Other assets 103.1 0.7 110 0.6 120.8 0.Total, by assets 14650.3 100 16963.7 100 15482.6 Cash in circulation 4153.9 28.4 4378.2 25.8 4024.9 26.Funds deposited in accounts with the 9729.8 66.4 10237.6 60.4 8520.7 55.CBR including the RF Government’s 7145.9 48.8 7093.9 41.8 5441.6 35.resident credit institutions’ 1097.6 7.5 2010.1 11.8 1214 7.Receivables 50.3 0.3 16.1 0.1 52.2 0.Issued securities 40.7 0.3 12.5 0.1 111 0.Other liabilities 201.6 1.4 319.2 1.9 823.7 5.Capital 474.1 3.2 1902.4 11.2 1950.1 12.Profit in the banking year 0 0.0 97.8 0.6 0 0.Total by liabilities 14650.3 100 16963.7 100 15482.6 Source: the CBR Money supply M2 in national terms increased in 2008 just at 1.7% and as of January 1, 2009, accounted for Rb. 13, 493.2bn, or 32.5% of GDP (as of January 1, 2008, Ì2 equaled Rb.1,3272.1bn, or 40.2% of GDP). Main reasons behind such a slow rise of money supply were the CBR’s sales of international reserve assets for the sake of protecting the Rb. exchange rate and a fall of the lending activity in the banking system due to the crisis. In 2009, money supply tumbled by 1.4% and by September 1 had hit the level of Rb. 13,305bn (32.5% of GDP). So, in 2009, the monetization rate of Russia’s GDP remained at its 2008 level.
Compression of money supply in 2009 was noted only in January – at the time, by results of the month it plunged by 11.1% resulting from the CBR’s large-scale forex interventions. In the conditions of a high uncertainty about further trends of Russia’s economic development, an increase in money supply in the medium term will be determined largely by the situation in the foreign trade sector, velocity of the economy’s recovery, and the lending activity in the banking sector.
Section Monetary and Budgetary Spheres 2.1.2. Inflationary processes In the first half 2008 inflation remained high compared with the same period of the previous year (Fig. 2), with a rapid increase of money supply in late 2007 accelerating the price rise. But in the second half 2008, due to the contraction in international reserve assets the CBR was selling to buoy the Rb. exchange rate, money supply began to contract and the price rise rate started slowing down. In all, by results of the year the CPI hit 13.3% vs. 11.9% reported in 2007, with consumer prices nationwide rising at an average 3.2% between September and December (vs. 4.8% over the same period of the prior year).
But the depreciation of the Rb. in early 2009 triggered an acceleration of the price rise, when the contracting domestic and external demand continued inhibiting it. With the Rb. exchange rate stabilizing, the decline in economic activity has formed a critical factor fanning up inflationary processes and the CPI in Russia accounted for 8.8% by results of the year. Let us examine the 2009 dynamic of the CPI in a greater detail.
Source: the Rosstat Fig. 2. The Dynamic of Russia’s CPI (Monthly Values) in 2008–Costs of paid services to the population gained 11.6% in 2009 (15.9% â 2008 ã.). Between January and December it was prices for housing and utilities (+19.6%), preschool education services (+16.2%), medical services (+13.9%) that posted the highest growth rates. So, the paid services to the population became the greatest contributor to the 2009 increase in the CPI. Prices of non-food goods soared at 9.7% (+ 8% - in 2008). Between January and December it was prices for tobacco goods (+ 18.7%), medicines (+17.6%), washing and cleaning goods (+12.6%), and clothing and linen (+11%) that demonstrated the highest growth rates.
Between January and December 2009 food prices surged by 6.1% (16.5% over the same period of the prior year) (Table 3). In 2009, it was prices for white sugar (+42.7%), fish and seafood (+10.6%), and liquors (+8.9%) whose contribution to the price rise for foods was the greatest one. The 2009 growth in the basic consumer price index made up 8.3% (13.6% - over the same period in 2008). So, the main factors behind the 2009 inflation slowdown were the RUSSIAN ECONOMY IN trends and outlooks declining domestic demand as a result of the crisis, a slow rise of money supply over the first three quarters, and the price downfall for an array of import goods (foods, primarily) on the global market.