Secondly, accumulation of debts will beinfluenced by the world markets conditions on the raw material and energysupply markets. Export prices changes have a double effect on accumulation ofdebts: changing on-budget expenditures and influencing the real rouble exchangerate. Consequently the expected fall in oil prices (see the macroeconomicforecast for 2000), the main component of the Russian raw materials sector onthe one hand will reduce budget revenues, on the other hand reduction of theblack ink side of the trade balance will promote a fall in the real roubleexchange rate. The effect of the first factor is going to be a considerable oneif it leads to non-performance of planned on-budget expenditures. That kind ofsituation will be possible in case prices will fall below the expected level(planned in the budget). As our previous empirical tests show8,non-performance of planned on-budget expenditures is one of the major factorsfor accumulation of debts.
A possible drop of the real rouble exchangerate9 because of fall of oil prices as our calculations show10, on thecontrary promote reduction of non-payments. Mechanism of this influence isprobably based on reduction of external competitive influence for home marketoriented branches (imports substituting), a better financial situation for themand a better financial situation for exporters.11. A growth of export rawmaterial prices has the reverse influence on the real rouble exchange rate andnon-payments.
The ongoing restructuring process (probablynot a very active one), extinction of outdated ineffective branches promote areduction of accumulation of new overdue debts. The political certainty againstthis background as an indication of stability, no doubt, has a positiveinfluence on the investment situation and can also contribute to a reduction ofoverdue debts.12.
Solving the Problem of“Redundant Liquidity”, Credit Rationing Degradation
In the annual survey for 200013 we wroteabout the problem of “redundant” liquidity and the “enigma” of money multiplier, which become majorkey-trends in the monetary and credit sphere in 2000. The situation developmentanalysis for 2001 shows that in the past year these two problems were to acertain degree solved.
In 2001 the narrow monetary base increaseamounted to 36.35%, the reserve money increased by 28.70%. Thus, money supplyas well as demand for it increased at a much slower pace. Monthly fluctuationsof money supply increase rates were typical of the past three years and relatedto seasonal fluctuations of foreign currency export revenues and accumulationof gold and foreign currency reserves by the Bank of Russia on the threshold offoreign debts payments by the Russian Federation.
A moneysupply structural analysis (“reserve money” aggregates) in 2001 (Figure 11) shows that the negativetendencies of 2000 were mastered. In particular, the share of idle reserves(balances of correspondent and deposit accounts of commercial banks in the Central Bank) bythe end of the third quarter was brought to the level of 22.5% of reserve money(compared to 24.6% in June 2001 and about 35% in 2000). Its growth in thefourth quarter to the level of 24.5% is explained mainly by calendar effects ofthe end of the year (balance growth of correspondent accounts on the eve ofnew-year banking holidays). The compulsory reserve fund got stabilized and in the course of 2001equalled to 14-14.5%. Cash demand changes exert more influence on the monetarybase. At present the share of cash in reserve money exceeds 60%, theМ0 to М2 ratio is 36–37%. In fact, the structure ofmoney aggregates has returned to the pre-crisis level. Taking intoconsideration the factthat gold and foreign currency reserves of the Bank of Russia have been growing rapidly during the whole of theyear, one can say that the sterilization policy of the money administrators hasbecome more effective.
Among possible instruments to solve theproblem of “redundant liquidity” used by the Bank of Russian in 2001 one canname stimulation of foreign currency demand using negative real rates for the majority offinancial rouble assets, accumulation of funds on budget accounts and a more extensive privatecrediting by the banking system.
In particular, balances under the generalgovernment in the Central Bank of the Russian Federation by the beginning ofDecember 2001 reached the level of nearly 412.1 billion roubles, an increase by71.4% compared to the beginning of the year (as of the beginning of the yearthese balances decreased to 295 billion roubles, it was related to the mainpart of on-budget expenditures during the last month of the year). In otherwords, money withdrawn from the economy through taxes constitute up to 47-48%of the total amount of the reserve money. It is evident that in order to reachstability in the moneysphere one needs, at least, a coordination of actions between money and fiscaladministrations.Otherwise, releasing such huge money (e.g. in form of interest-free budgetexpenditures) means forthe market that it can have serious inflationary consequences and putstability of the rouble exchange rate into jeopardy. At the same time it shouldbe noted that the current Government of the Russian Federation keeps strict budget policies,using money to buy foreign currency to pay off foreign debts directly from the Bank ofRussia (which is testified by fluctuations of the gold and foreign currency reserves) and preventsin this way shocks on the money and foreign currency markets. Budget accountbalances used in this way are analogous to an accumulation in some kind of astabilization fund, butkept on the account in the national currency and, thus, making no profit theyare not protected against risks of inflation and exchange rate fluctuations.
Anothernon-traditional instrument to sterilize the redundant emission caused bypurchase of foreign currency by the Central Bank on the market was to inducedemand of foreign currency by commercial banks keeping negative percentagerates for liquid financial assets in the national currency. In this way yieldsof state bonds (GKO and OFZ) during the whole of the past year were between 15%and 18%, annual rates on the inter-bank market and for deposits in the CentralBank were brought down to the level of 2-5% per year. It is evident that withthe present inflation rate investing into foreign assets is more profitableeven taking the nominal rouble exchange rate growth into consideration. Inspite of the fact that in 2001 total share of foreign assets in assets of thebanking system fell from 25% to 18% (Figure 12) more and more of foreign assetswere transferred to balances of current accounts and deposits in foreign banks(their share in the first half of the year grew from 13.2 to 16.9 billion USdollars, and it was only in the third quarter that it went down to 15.2 billiondollars). In other words, banks preferred just keeping their assets in foreignbanks and get a low rent (in foreign currency), than investing them into evenless profitable assets in roubles.
At the same time as one can see from Figure12 in 2001 there was a considerable growth of credits given by banks to theprivate sector and their share in the total of assets of the banking systemincreased from 38% to 47%. Accordingly, the multiplier growth trend (Figure 13)was preserved, that is commercial banks were expanding their credit operationsincreasing money supply to the economy.
By the end of August 2001 the moneymultiplier (ratio of money stock М2 to reserve money) grew compared to the beginning of the yearapproximately by 10% (from 1.55 to 1.70) and by 19.5% compared to the minimalvalue (July 2000). The level achieved (about 1.7) corresponds to the level ofthe end of 1998 – thebeginning of 1999. At the same time it should be noted that during practicallythe whole of 2001 (since April) the multiplier remained unchanged. As we viewit this is connected with the fact that a certain maximum level of monetizationof economy in the present situation was reached, which we mentioned in ourAugust 2001 survey.14 At the same time the shareof idle assets of commercial banks in the monetary base was continuouslyfalling. In the second half of 2001 the share of assets of commercial banks oncorrespondent and deposit accounts in the Central Bank reduced to the level of22-23% of reserve money as compared to 27.5-28.5% in the first and secondquarters of 2001.
The ratioof cash money and the volume of the required reserves remains unchanged (cashmoney is about 80% of the narrow monetary base). Thus, in spite of theincreased amount of credits given by banks to the economy they are still to agreat extent being turned into cash money (e.g. in form of wages and salaries)and “money multiplication” chains in Russian economy remain short.
* * *
The above analysis of processes in the moneysphere of Russian economy in 2001 gives grounds to make the followingconclusions that concern the nature and particular features of the money andcredit policies:
Intensity of inflation processes in 2001 continued to reduce, theregistered CPI increment was about 18.6%, which is the second annual inflationminimum since the beginning of reforms in Russia. At the same time fluctuationand dispersion of indices for different groups of goods remain, which isexplained first of all by the prevailing influence on inflations dynamics ofnon-monetary factors (rise in regulated prices of natural monopolies).
Changes in the nominal rouble exchange rate remained smooth duringpractically the whole of the year (excluding the last 1.5 months), during theyear the rouble devaluated by approximately 7%. Consequently, a third yearrunning there are preserved moderate (about 10%) rates of revaluation ofRussia’s nationalcurrency.
In 2001 the Bank of Russia accumulated all-time high gold andforeign currency reserves (over 38 billion dollars) in spite of growingpayments to settle foreign debts and reduction of the positive balance of thecurrent account and the beginning of the foreign currency liberalizationprocess (in particular the lowered norms for obligatory sale of foreigncurrency revenues from 75% to 50%, permission to private persons who areRussian residents to open accounts in foreign banks and invest into foreignsecurities for sums of up to 75000 US dollars).
In the past year the Central Bank of the Russian Federation solvedthe problem of “redundant liquidity” in the banking system. Among solutioninstruments one should mention first of all promotion of investments intoforeign assets by supporting negative real interest rates for assets in roublesand accumulation of assets on accounts of state bodies. At the same time onecan also mention stabilization of money supply growth rates by the bankingsystem by means of private sector crediting and a certain credit rationingdegradation.
In the second half of 2001 a slower growth rate of demand for moneyand stabilization of the level of economy monetization became obvious. At thesame time downtrend for non-monetary settlements and non-payments betweenenterprises continued. Starting in the second half of 2001 demand for moneyincreased mainly because of capitalization growth in the banking system andreturn of popular faith in bank deposits, while balance accounts of enterprisesremained practically unchanged.
Table 2 (А)
Money and Financial MarketsIndicators’dynamics in 2000 –2001
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