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In January 2009, the growth of excessive reserves of commercial banks7, which has begun in November last year was suspended: the decrease has reached RUR 612.2 billion, or 52 per cent. The reBasic index of consumer prices is an indicator of the inflation level without regard to seasonal price reduction (fruit and vegetable products) and to administrative measures (tariffs for government-regulated services, etc.). It is estimated by the RF Statistics Service.

The RF monetary base in broad terms with no regard to the cash issued by the Bank of Russia and the balance of Compulsory Reserve Accounts on credit organizations in national currency, deposited in the Bank of Russia, taking into account the assets of correspondent accounts and bank deposits, allocated in the Bank of Russia.

The excessive reserves of commercial banks with the RF CB refers is the amount of correspondent accounts of commercial banks, their deposits with the RF CB and the CB bonds of commercial banks.

duction of reserves was based on, first of all, more than double decline of funds on correspondent banks accounts in Russia. The December increase of this indicator was provoked by an opportunity to open correspondent accounts not only in RUR, but in foreign currency as well. Consequently, in the background of smooth RUR devaluation, the banks rapidly started to open foreign exchange correspondent accounts. That decreased indicator in January can be attributed to the curbed RUR devaluation, taken under control, as well as the upgraded value funds, provided by the Central Bank of Russia to credit organizations.

Therefore, the situation with the ruble bank liquidity is still tense, what is confirmed by the high rates in the interbank credit market (in January, the interbank rate for one-day ruble credits has grown to 16.3 per cent as compared with 8,3 per cent a month earlier). At the same time, as a result of RUR smooth devaluation, the banks were able to earn substantial amounts, settled at their correspondent accounts at the Bank of Russia. Therefore, currently the main problem is not in the lack of resources in the banking system, but rather in the sustained high uncertainty about the further development of the situation in the economy, as well as the expected growth of bad debts of the banks under the loans, issued earlier.

The reduction of the volume of cash in circulation by 14.5 per cent and mandatory reserves by 1.per cent has led to the decline of the monetary base in narrow definition (cash+ mandatory reserves)by 14.4 per cent (see Fig. 2). Herewith, the volume of the Central Bank foreign currency reserves has decreased by 9.4 per cent and made USD 386.9 bln by February 1, 2009.

Source: RF Central Bank Fig. 2.

In January capital outflow from the RF was continued. Moreover, in December prices for energy resources stayed low, what provoked further decrease in the inflow of foreign currency reserves to Russia. As a result, RUR real effective exchange rate decline has continued, having dropped down by 7.per cent within January, and by 10.9 per cent within the last two months. The real effective RUR rate index made 126.29 (See Fig. 3). The official RUR exchange rate against USD in real terms has grown by RUR 6.01, from RUR 29.4 to 35.41 within January. RUR exchange rate against Euro has grown to We would like to remind, that the monetary base in the broad definition is not a monetary instrument, it reflects the obligations of the Bank of Russia in national currency. The monetary base in narrow definition is a monetary instrument (one of indicators of the volume of monetary offer), which is under total control of the CBR.

The level of January 2002 is accepted as 100 per cent.

45.7 in the late January. As of the preceding month results, RUR has declined by RUR 5.20 against the two-currency basket10, the value of which has grown by per cent, from RUR 34.8 to RUR 40. However, in late January the Central Bank has informed on the suspension of the RUR devaluation (see January Survey) and in February the two-currency basket value was supported within the rate, established by the RF Central Bank.

Source: RF Central Bank, authors estimates Fig. 3.

As of October 1, 2008 the total foreign debt of the Russian banks and companies has amounted to USD 497.7 billion (see Fig. 4). Therefore, within the two years (from October 1, 2006), the amount of corporate debt was grown more than two-fold. Since the beginning of 2008 the external debt of the banks has grown by 21 per cent to USD 196.7 billion, the debt of non-banking sector of the economy - by 18 per cent to USD 268.7 billion, the debts of companies and banks to their direct investors - by 20,1 per cent to USD 32,3. The crisis could not fail to affect the external debt of the private sector.

Firstly, the deterioration in liquidity has notably reduced the growth of external debt in the third quarter of 2008 as compared with the second quarter (4,5 times in the banking sector, 3,7 times in the nonbanking sector). Secondly, the banks have arrears, which amounted to USD 0.2 billion as of October 1, 2008. And thirdly, the structure of external debt in terms of urgency has been changed unfavorably:

the growth rate of short-term liabilities since the beginning of the crisis has exceeded the growth rate of long-term commitments. Thus, in the third quarter of 2008 as compared with the second quarter, the growth of the short-term bank debt amounted to 5,1 per cent, while the liabilities under the long-term debt has reached 1.8 per cent (against, respectively, 8,4 per cent and 14,5 per cent in the second quarter of the year). The growth of short-term liabilities of non-financial companies in the third quarter was equal to 9,4 per cent, while the long-term ones - 1.5 per cent (against, respectively, -0.8 per cent and 11.4 per cent in the second quarter of the year).

As is known, the adverse situation with the foreign debt has forced the non-financial companies and banks take active measures to relocate their credits to public banks in the fourth quarter of the year.

We expect that the statistics on external debt in the fourth quarter of 2008 and the first quarter of will demonstrate even greater slowdown in the corporate debt growth. Herewith, the external debt Two-currency basket is the RF Central Bank operational indicator in its foreign currency policy. Currently the share of EURO in the currency basket makes 45 per cent, USD 55 per cent.

redemption will continue to provide negative pressure on the ruble11. The total external debt of the private sector, which has to be repaid in 2009, makes USD 136.1 billion (USD 114.1 billion of principal debt and USD 22 billion is the interest).

Source: RF Central Bank, authors estimates Fig. 4. Total external debt of the banks and companies within January 2006 - October Upon completion of managed devaluation policy, the Bank of Russia has increased twice within the month the key interest rates to maintain the RUR stability. In particular, on January 30, the Bank of Russia informed on the increased interest rates on the most popular tools, providing liquidity to commercial banks since February 2. The interest rate on lombard credits, provided from 1 and 7 days was increased from 10 to 11 per cent per annum and those for a period of 30 days - from 10.25 to per cent per annum. Operations under direct REPO interest rate has also increased from 10 to 11 per cent per annum, as well as the rates of secured credits have been raised from 11 to 11.25 per cent per annum. On February 9, the Bank of Russia continued the policy of more expensive resources to commercial banks to reduce pressure on the ruble rate. In particular, the fixed interest rates on lombard credits and secured credits and operations on direct REPO transactions increased by 1 percentage point on average. Minimum interest rates at direct REPO and lombard credits auctions have been also increased by 1 percentage point. Moreover, the RF Central Bank has increased the interest rates on deposit operations by relevant amount.

The basic reason for the interest rates growth was the desire to increase the cost of the RF CB resources, attracted from it by credit institutions for further investment in foreign currency. We'd like to remind, that since January 23, the RF CB has established the upper limit of the two-currency basket at the level of RUR 41 against USD 1 and has informed of its readiness to support the ruble at that level at least for several months. Herewith, already on January 30 the value of the two-currency basket has exceeded RUR 40 upon tax liabilities settlement, when untied ruble liquidity became available at the banks. Despite the fact that even in November the two-currency basket value did not exceed RUR 30, the purchase of foreign currency was rather profitable way of investment for the Russian economic agents. Devaluation expectations are supported by the sustained low oil prices, provoking the decline In the statistics for the first quarter of 2009 the Rosneft may provide an affect. This public company, as well as Transneft have agreed in February to obtain credits from the China Bank of Development, totaling to USD 25 billion. However, it is expected that the bulk of this amount will be used to refinance Rosneft foreign debts, what should be reflected in the statistics of the second and third quarters of 2009.

in foreign exchange inflow to the country. In such a situation, the Bank of Russia has decided to limit the ability of banks to purchase foreign currency, having increased the cost of ruble resources. Given that the Bank of Russia assets are playing an increasingly important role in the liabilities of Russian banks, such policy can reduce the attractiveness of foreign currency purchases, especially against the background the RF CB management statements, that the sharp decline in imports in late 2008 - early 2009 helped to offset the current account balance of payments. Herewith, at the absence of alternative sources of liquidity, the CB interest rates provide a significant impact on the situation in the banking system, even though they remain negative in real terms, with regard to the estimated inflation rate in 2009.

Moreover, on February 24 the Bank of Russia has informed on amendments to the order of establising the minimum interest rate for direct REPO auctions for the term of 1 day and 1 week. Earlier, those rates were changed relatively infrequently (usually with regard to refinancing rate amendments) and had to be approved by the RF CB Board of Directors. In view of the new arrangements, the Bank of Russia will establish the rates on daily basis for the auctions for the term of 1 day (starting from February 24) and on weekly basis for the term of one week (starting from March 3) at the level no lower than the rates, established by the RF CB Board of Directors. This measure is aimed at strengthening the ability of the Bank of Russia for the operational management of the situation in the monetary market. We would like to remind, that the current auctions on direct REPO is the major source of liquidity replenishment in the banking system. Therefore, the interest rate policy of the Central Bank of Russia has a strong impact on the entire financial system of Russia, including the foreign currency market. In the situation of financial instability and rapidly changing economic environment, the credit and monetary regulatory authorities have expanded their capacity promptly to react to the changing market conditions.

On February 9, the Central Bank has reduced the requirements to the minimum liquidity of the banks (to RUR 20 billion), which gives the right to enter into the agreements on partial compensation of losses incurred at the interbank credit market. Despite the arrears in the interbank sector is insignificant, this measure is aimed at activating the interbanking market in the crisis situation, when the Bank of Russia is virtually the only source of liquidity for the banks.

On February 9, the Board of Directors of the Bank of Russia has decided to expand its lombard list, i.e., the list of securities, that can be used by commercial banks as a pledge to attract funds from the RF CB. Now, this list includes shares and bonds, issued by companies included in the list of the backbone companies, approved by the Government Commitee on improvement the Russian economy sustainability. Herewith, those securities should be included in the quotation list of at least one stock exchange, operating in the territory of Russia.

This measure should urge a greater demand for the securities of those emitters on the part of the banking system and therefore, expand the ability of those companies to attract financing. Lombard list extension should improve the performance of credit organizations that keep on the balance sheet the securities of the backbone companies, that were not included in the lombard list earlier, as now such banks will be able to obtain financing under security of such instruments. At the same time, it should be understood that providing funds to the banks under such securities, the Central Bank of Russia takes surplus risks associated with possible deterioration of the situation of the backbone enterprises.

Moreover, the decision taken by the Bank of Russia in fact leads to one more emission center formation. Now, the companies, included in the list of backbone ones, are able to issue securities, that can be purchased by banks and used as security to obtain funds from the RF CB.

In our view, the expansion of the Lombard list allows to improve the situation of the backbone enterprises to some extent. However, we believe that the anti-crisis policy should be aimed not only at the support of the largest enterprises, but also at the crisis impact mitigation to all economic agents.

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