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Article / 09 September 2016 at 10:00 GMT

Central bank of Russia carries on the balancing act

Russia oil and gas expert
United Kingdom
  • Russia's Reserve Fund more than halved nominally in last 12 months
  • Rate of depletion would see fund at zero in 2017
  • Reality is that Russia's total FX reserves are on the rise
  • Central bank is holding onto FX and printing money to cover budget deficit
  • Macro stability dominating agenda and central-bank policy accordingly


The central bank is determined to follow a path that ensures macro stability. Photo: iStock

By Nadia Kazakova

On paper, Russia's Reserve Fund has more than halved over the last 12 months, down from $71 billion to $32 billion as of September 1, 2016. Normally, it would imply that the Russian government has been spending FX reserves to cover the budget deficit and the Russian reserves should have declined accordingly. 

Russia's Reserve Fund balances and transfers in 2015-16, RUB and USD billion

The government has spent some RUB 1.17 trillion ($18 billion) from the fund since the start of the year to cover budget deficit. The bulk of the spending, however, is likely to happen in the coming months as it did last year. It would more or less deplete the Reserve Fund by early-mid next year (depending on the oil price and privatisation deals). 

The government would then have to move on to spend the National Wealth Fund, which stood at $72.7 billion as of September 1, 2016. Excluding money already invested, liquid FX assets amounted to around $48 billion. There was media speculation that funding of various infrastructure projects from the National Wealth Fund might be subject to revision. Presumably, to save fund's money. 

Most of it, however, is happening notionally. In reality, Russia's total FX reserves are on the rise, which indicates that the central bank holds on to FX and prints money to cover budget deficit. It has been happening throughout this year and is unlikely to change in 2017.

While most of the $26.7 billion increase in FX reserves this year is down to repayment of REPO loans ($11bn) and gold ($4bn in purchases and $11bn in revaluation), there is not a sign of spending of the Reserve Fund. Its decline seems to be a simple reclassification into Other FX reserves. The last time the central bank sold FX was in early February 2015. 

Russia's FX reserves break-down, USD billion

To the central bank's credit, it tries hard to mop up some of the newly printed roubles from the system. The macro stability (low inflation, stable rouble) seems to be the name of the game and it requires the central bank to play accordingly. 

Since last year, the central bank has been cutting back on its short-term loans to the banking sector. From early August the central bank re-started its deposit auctions, taking some excess RUB 100-200 billion from the Russian banks (mostly on weekly basis), paying 10.2-10.4% annual rate for the privilege. 

Another, more drastic tool has also been used. It is an increase in reserve requirements (proportion of clients' deposits to be held at the central bank, which earn zero for Russian banks), with three rises so far this year. According to Fitch's latest Russian Bank Datawatch,, higher reserves might absorb some RUB 600-800 billion from the banking system this year. 

The problem, of course, is that the banking sector has less incentive in making loans (and give a little push to the economy), when risk-free rates of over 10%/annum is on offer from the central bank and higher reserves mean less money available for lending. 

It seems to be a price that the Russian central bank is prepared to pay for holding on to the precious FX and for achieving the all important goal of macro stability.

- Edited by Martin O'Rourke

Nadia Kazakova is an oil and gas expert on Russia


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