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To buoy the banking sector in the conditions of the unfolding financial crisis, the CBR began enter into agreements with large Russian banks on compensating a part of their prospective losses due to interbank lending. The Bank of Russia has also assumed an obligation to compensate to the banks a part of their losses with regard to their transactions with other banks whose licenses were subsequently revoked. As of October 1, 2009, the CBR had concluded 18 such agreements. As well, the CBR has also undertaken such measures as provision of the REPO financing against the collateral in the form of an extended list of assets, extension of the term of the REPO lending, provision of subordinated loans to strategic banks, and adoption of the legislation on guarantees by corporate loans. In addition, in order to conduct a bailout of the banking system, the Deposit Insurance Agency has been recapitalized.

Section Monetary and Budgetary Spheres Let us note that in order to tame speculations on the forex market, on December 25, 2008, the CBR offered recommendations to credit institutions not to boost up their foreign assets and net balance positions by foreign exchange, whose exercise the Bank of Russia accounted while imposing limits on the credit institutions participation in forex auctions. The recommendations have failed to preclude mass purchases of forex during the acute phase of the crisis, but they contributed to subdue the boom on the forex market in the course of the stabilization of the financial markets. On July 2, 2009, the CBR announced that due to stabilization of the situation on the domestic forex market, it ruled not to extend the effect of the recommendations. Thus the Bank of Russia demonstrated it was confident that a large-scale capital outflow and depreciation of the Rb. exchange rate in the second half 2009 were unlikely developments.

Finally, on December 30 2009, the CBR modified procedures of the credit institutions building provisions for losses on loans and advances. In compliance with the effective procedures, credit institutions are bound to provide reserves for possible losses on loans depending on the degree of credit risk. That said, the exercise diminishes the volume of resources available for commercial banks to carry out their current operations.

According to the decisions, credit institutions were granted the right not to increase their reserves on loans through December 31, 2009, in the event:

the delinquency by the principal debt or interest on the debt has extended for no more than 30 calendar days relative to the effective term;

the loan is restructured (e.g. in the event of a change of the currency in which the loan has been denominated, modified (the principal debt and/or interest repayment timelines) in the period since October 1, 2008;

the loan received since October 1, 2008, is used for repayment of an earlier extended loan.

The move was devised to help the banks cope with yet another challenge they had faced when the unfolding crisis battered the national real sector, that is, growth in arrears by earlier disbursed loans. While the arrears growth rates fell in the fall of 2009, the problem of bad assets still appears a fairly persisting one and may aggravate once again, should the state of affairs in the national economy deteriorate.

In 2009, the mechanism of extension of subordinated loans to banks has proved to be fairly efficient one, as far as the recapitalization function is concerned, at least, for the largest banks. Provision of the first-level capital to banks with government participation in the current volume is most likely to satisfy their need in capital even in the event the situation develop according to the negative scenario. As to the backbone private banks, should they face capital shortages, there exists a mechanism of implanting the temporary administration therein represented by the Deposit Insurance Agency, which was commissioned to conduct their rehabilitation.

Let us note that without cleaning the banks balances from problematic assets, regalvanizing the lending to the real sector may take long. Anyway, while tacking this challenge, the governments participation will allow a substantial simplification of the process. To maintain the budget stability, it seems appropriate to replace a fraction of problematic assets with longterm securities backed by the government agencies guarantees. This can form a plausible mechanism to solve the problem.

Other key monetary policy measures aimed at bolstering the financial stability the Bank of Russia implemented during the financial crisis were:

RUSSIAN ECONOMY IN trends and outlooks 1. The Board of the Bank of Russia twice (on January 19 and April 23, 2009) ruled to extend the timelines for a stage-by-stage increase of the effective standards of contributions to the Compulsory Reservation Fund (CRF). As a reminder, since October 15, 2008, the Bank of Russia lowered the respective contribution rates they were set at 0.5% across all kinds of reserved liabilities. On the same date it was ruled to lower the rates for a certain period of time they should be raised up to 1.5% since February 1, 2009 and to a further 2.5% - since March 1, 2009. On January 19, the Bank of Russia decided to shift the timelines for increase of the standards from the said dates to May 1 and June 1, 2009, respectively. According to decisions made in April, the standards were set for a stage-bystage 0.5% increase- that is, on May 1, June 1 and August 1. So, the level of all the standards had hit 2.5% by August 1.

The CBR took the decision because of a complex situation in the domestic financial sector, which was spurred by the global financial crisis. Russian credit institutions may soon face a rise of arrears on extended loans, which would derail their financial standing. Withdrawing liquidity from banks in the form of deductions to the CRF would add to their financial instability. We think that in the event there are no signs of improvement of the state of affairs in the banking sector in the summer 2010, the timelines of the increase of compulsory reservation rates may once again be modified.

In addition, the Bank of Russia offered credit organizations, regardless of classification groups they are awarded with resulting from their economic standing, the possibility to use the averaging of emergency funds1. Lastly, in August 2009 the CBR ruled to shift, since November 2009, timelines of conduct of regulation of emergency funds in such a fashion so that the end of a regulation period would not coincide in time with the period when banks need in liquidity on the dates of tax payments to the budget is the greatest one.

2. On January 19, 2009, the CBRs Board took a decision to extend the term of assetbacked lending available to banks up to 365 calendar days, while the earlier set maximum timeline for such loans had been 181 days. Besides, on June 15, 2009, there was held the first ever direct REPO auction for the term of 1 year.

Let us note that in the spring 2009 the CBR has been gradually cutting back on volumes of unsecured lending, and with the economy stabilizing, the Bank of Russia is in transition towards long loans backed by papers. We find this move to be a right one it will contribute to solidification of the financial stability and increase in the CBRs influence on interest rates.

3. On February 9, the CBRs Board decided to extend the Banks Lombard list, ie the list of securities against which commercial banks may attract the Bank of Russias resources.

Added to the list were stock and bonds issued by companies enumerated in the list of strategic backbone corporations approved by the government commission on increase of stability of the Russian economys development. That said, such papers should be included in the quotation list of at least one exchange operating in the territory of the Russian Federation. The CBR started to accept such corporations promissory notes and credit contracts as a security against disbursed loans.

The averaging of emergency funds enables credit institutions to hold on their corresponding accounts and use in settlements a fraction of emergency funds equaling the averaging coefficient.

Section Monetary and Budgetary Spheres The move pursues the goal of boosting the banking systems demand for these issuers papers and, accordingly of bolstering the opportunity for them to attract financing. Meanwhile, it should be remembered that while providing liquidity to banks against such papers, the CBR assumes the risks associated with a possible aggravation of the strategic corporations standing. Plus, the extension of the Lombard list should improve the standing of those credit institutions on whose balance sheet there are securities issued by backbone corporations whose papers were not previously been included in the Lombard list, as such banks can now get financing against such papers.

4. On March 27, the Bank of Russia announced changes in the methodology of calculation of the Russian commercial banks statutory requirements. In compliance with the ruling, first, participation of public corporations in legal entities authorized capital is not regarded as the grounds for classification of these legal entities as a group of associated borrowers for the sake of calculation of a rate of the maximum size of the risk per borrower or a group of associated borrowers (N6). The rate is calculated as the banks calls to the group of associated borrowers to the banks capital ratio. In all likelihood a number of banks have found it hard to comply with N6 due to the financial crisis and the public companies participation in numerous corporations capital. So, the decision can be regarded as a softening of regulation for such banks.

Second, the Bank of Russia decided to set a 50% risk coefficient with regard to credit calls to open-end joint-stock companies that meet the natural monopoly criteria, providing they are included in section 2 of the List of Strategic Corporations and Strategic JointStock Companies as well as providing the companies securities have been included in the Bank of Russias Lombard list. The measure, too, is to soften for banks restrictions on lending to such corporations from the perspective of the credit risk rate.

5. On April 10, the CBR ruled to raise credit limits by unsecured loans extended to credit organizations that, at the same time, meet the following criteria:

- their long-term international credit rating is not below B (by the S&P and Fitchs classification) or below B3 (by the Moodys classification);

- they have decided to convene the general shareholder meeting of the credit organization, with the issue of its reorganization in the form of merger or acquisition on its agenda, and submitted the respective information to the Bank of Russia;

- they have got agreements by which creditors lodged a claim to the said credit organizations on an early execution of their obligations in connection with the rise of developments determined by the reorganization, and submitted the respective information to the Bank of Russia.

So, the CBR has extended its possibilities to provide financial aid to credit organizations engaged in M&A processes. This move can be regarded as a positive one, as Russias banking system appears overly fragmented, with most banks not actually exercising the classical banking functions. In the circumstances, encouraging consolidation in the sector proves to be a fairly justifiable move on the part of the monetary regulator.

On May 26, the CBR approved modifications of the methodology of calculation of credit institutions capital. In compliance with the novelties, banks can increase their Core Tier capital at the expense of a string of subordinated loans that must satisfy the conditions of longevity (for the term of not less than 30 years), non-cumulativity (the unpaid interest on them is not refunded, nor accumulated), as well as the possibility to cover the credit organizations RUSSIAN ECONOMY IN trends and outlooks losses. Meanwhile, the overall volume of included in the capital subordinated loans with additional conditions is capped at the level of 15% of the value of the Tier 1 capital.

Thus, the CBR has de facto softened its requirements to sufficiency of the credit organizations capital. The move was dictated by the growth of arrears and, accordingly, the need for securing reserves against potential losses. In so doing, it is important to bear in mind that such moves do not resolve the problem of growth in arrears debts per se nor they give banks additional resources to overcome that. Rather, they were devised to preclude the rise of an inconsistency between the large banks reporting and the regulators requirements, which may trigger negative systemic effects on the financial market.

7. On June 19, the Board of the Bank of Russia introduced a number of amendments to the Instruction On compulsory standards for banks which is one of the pivotal ones for the domestic credit organizations, as it sets compulsory standards failure to comply with which can result in the license revoking. The main amendments are:

- a considerable increase in the minimum amount of the credit institutions own capital (from euro 500,000 up to Rb. 180m);

- setting a 70% risk coefficient by mortgage loans that meet the following conditions combined the banks own capital sufficiency rate (N1) and the maximum amount of risk per one borrower or a group of associated borrowers (N6);

- setting a 10% decreasing coefficient on calls by mortgage loans extended to the military who partake in the savings-and-mortgage system;

- exclusion of an increased (1.3) risk coefficient with regard to calculation of N1 standard by calls to credit institutions that are members of the same group as the lending bank;

-Vnesheconombank, which, in compliance with the federal act On the development bank, is a public corporation that performs banking operations while exercising its function, has become subject to the same approaches to risk (credit, liquidity) assessment as the ones applied to resident banks of RF;

- calls towards resident banks of RF that have arisen with respect to transactions completed between October 14, 2008 and December 31, 2009, in the part subject to the CBRs compensation have been now classified as risk-free assets;

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