Don't worry — be happy, says Russian central bank
- Russian central bank sees lending recovery by end-2016
- Rouble rate still closely tied to oil price
- FX distorted as top 30 banks exploit advantage in rouble money markets
Russia's central bank has rather a benign view on the state of the money markets. Photo: iStock
By Nadia Kazakova
As a wall of liquidity hits the Russian banking system, the central bank tells us not to worry.
This might be the purpose of the newly launched quarterly report, both to explain what is going on in the money and FX markets, and sooth the nerves on the future outlook.
In one sentence, the Russian central bank thinks that the worst is very much over with little reason for concern, even if some niggling details are getting on the way.
So the central bank's spiel is that Russian banks are getting plenty of cash from the government. It would allow the banks to pay back most of their expensive repo loans to the central bank by the year end.
The domestic FX market meanwhile is ticking away, in the central bank's view, and demand for USD (from several banks scrambling to refinance FX repo loans taken from the central bank a year ago) has been matched by USD supply from international investors (net inflow into Russian equity and bond funds was $842 million in February-March 2016).
There was no extra demand for FX cash from retail investors during a dip in the rouble FX rate in January.
The volatility of the Russian currency against the dollar has been actually pretty stable, when adjusted for the movement in the oil price. Of course, the oil price is still the main driver for the rouble but the central bank believes that USDRUB volatility will decline, moving towards 20% or so (against market expectation of 24%) if oil price volatility remains at around 40%.
Net margins must have been helped by a drop in deposit rates, as the banks get awash with government cash. The drop in rates might also explain the increase in the share of longer-term customer deposits, which offer them a higher rate of return. Some recovery in lending volumes is expected before year-end.
The banking-sector liquidity position is definitely improving. The banks have been repaying repo loans back to the central bank, but the cash is ultimately coming from the central bank itself, which would be printing money to finance the budget deficit (It might explain why inflation is stubbornly above 7% year-on-year).
The cash ends up in the banking system either as deposits from the ministry of finance or as corporate and retail deposits, when the government pays its wages/bills/advances.
By year-end, the central bank estimates that some RUB 4.65 trillion will flow into the banking sector as a result of budget deficit financing, enough to repay the outstanding central bank loans. Also note that the central bank seems to be cutting back by half the purchase of gold in 2016, possibly to keep a tap on overall money supply.
Most of the repo loans have been given by the central bank against relatively low quality/illiquid collateral. The larger banks now manage to replace these repo loans with cheap (free) government funds, while the smaller and mid-size banks are struggling to get a crumb from the liquidity feast. They might have to continue to borrow from the central bank despite an overall surplus of liquidity in the banking sector.
They take cheap roubles (presumably, they are first in line to get budget money through deposits) and then swap them for USD, rolling the swaps over on a daily basis. Apparently, the cost of such USD loans is about 1.2% annualised against 2.4% annual interest on the central bank's own FX repo loans.
Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector.