Russia's Ministry of Finance to increase budgetary support of bank system

Updated September 16, 2008

   The financial regulators try to ease the tension caused by the sharp shortage of facilities in Russia’s bank system. The Bank of Russia has provided the banks with RUR 326 million more within the auctions of the direct repo, and the Ministry of Finance has taken the decision to double the volume of the budgetary facilities’ inflow to the bank system. Thus, the rates of the interbank lending grew to 10-11% per annum. The initiatives undertaken by the authorities will not ease the tension, since not all organizations will have access to the budgetary facilities, and banks refuse to lend each other, the experts state.

   On September, 15, the Russian Finance Ministry declared that it would increase the maximum volume of the budget’s available facilities that could be placed on the deposits of the commercial banks from RUR 668 billion to RUR 1,23 billion. According to the Finance Minister Aleksey Kudrin, within the period following the launch of the mechanism of placing budgetary facilities on deposits, RUR 186 billion were really used, while the limit attains RUR 668 billion. On September, 16, within the deposit auction, the Ministry of Finance will offer the banks RUR 15 billion with the rate of 8% per annum, and on September, 17 - RUR 275 billion at 7,75% per annum. The facilities will be placed by October, 22 and 25 respectively.

   In the Ministry of Finance explain the increase of the limit by the intention to support the banks, whose situation is expected to aggravate in October due to the payment of taxes and the payments of the largest banks. According to the experts’ calculations, the banks will have to transfer RUR 500-600 billion to the budget. According to Aleksey Kudrin, the Ministry of Finance and the Bank of Russia monitor the situation at the financial market and contact with the largest Russian banks. According to him, Lehman Brothers’ bankruptcy, one of the largest US investment companies, will influence somewhat on the Russian market. "Our task is to support in time Russia’s system", the Minister declared. "All grounds of the current situation are external", Rory MacFarquhar from Goldman Sachs said, and explained that after Lehman Brothers announced that it had gone bankrupt, the key factor that predetermines the situation with liquidity was the capital outflow from the markets of Russia and other emerging countries due to the risks growth in the financial system.

   The increase of the maximum facilities’ volume placed on deposits should ease the tension at the interbank lending market, the analyst of Raiffeisen Bank Anton Pletenev considers. On September, 12, the rates of the interbank lending market (ILM) grew sharply from 7,5-8% to 9% per annum, and the volume of direct repo agreements with the Bank of Russia reached the record sum of RUR 340 billion. In the morning, on September, 15, the rates of the ILM grew to 9,5%, and during the day - to 10% per annum. "The rates of the secondary banks grew to 10-11% per annum, and we hadn’t seen such levels since autumn of the previous year, when the banks faced the liquidity deficiency for the first time", the senior dealer of MDM Bank David Kikvidze explains. On September, 15 the volume of repo agreements with the Central Bank totaled RUR 326 billion. The market participants specify that the huge volume of repo deals is predetermined partly by the necessity to pay the unified social tax (UST) the volume of which exceeds RUR 100 billion, the rest - by the sharp shortage of facilities.

   However, the tension at the financial market will continue, because only a small range of banks will get the budgetary facilities, the experts suppose. Several sources at the market said that early in September, the primary banks started to close limits for other participants of the ILM. "We have already used to when large banks start to isolate from the external world in the situation of the liquidity crisis", the dealer of the large Russian bank explained. "The banks have already started to cut limits for other financial organizations presented at the global money market", the head of ING Wholesale Banking’s department for conversion operations Aleksey Borichev says. "Don’t be surprised, if this starts in Russia as well". If the banks start to cut limits, the chain reaction will grip the market and the situation at the ILM will become quite tense, the analyst of Zenit Bank Alexander Ermak says, and adds that the ILM is the key source of funding for the majority of the small banks, therefore their activity can be suspended.

   The rates and the demand for money resources should reach the peak on September, 26 and 29-30. By this time, the repo operations, taking to account the liquidity reserves in the bank system (historical minimums of nearly RUR 400 billion), will exceed quite obviously RUR 500 billion. It is better to mark that the Bank of Russia’s operations, as compared to the overall assets of the Russian Federation’s bank system, already have larger scales than the operations of the US Federal Reserve System and the European Central Bank. If the Central Bank’s confidence in the possibility to regulate the currency exchange rate is predetermined by the international reserves of $580-590 billion, the Central Bank’s short-term inflows at the money market on September, 15 totaled nearly 2,2% of the money supply (M2 aggregate, RUR 14,2 trillion), and by September-end they can reach 5% from its amount. Obviously, it is impossible to treat them as macroeconomic unimportant, since if the financial crisis intensifies at the world markets, in September-October, the Central Bank will have to correct the monetary policy, and the government - to coordinate with it at least the short-term financial strategy.