Updated April 3, 2008

   The banking system will pass the first this year borderline of quarters through, maximum unfavorable from the viewpoint of tax payments, with the rather lower than expected increase of the money market rates and demand for the centralized refinancing.

   Despite the forecasts and the peak of repayments on the foreign loans and tax payments, which usually increase the demand for liquidity at the borderline of months and quarters, the specific tension at the money market was not observed within the first week of April. The requirement of the refinancing "lubrication" of the Central Bank is n-times less yet, than it has been forecasted a month ago. The demand for loans on repo operations is the main indicator of situation at the money market. This indicator has been observed only within three-four workdays and has dropped from the maximum RUR 120 billion at

the end of March up to insignificant figure at RUR 5 billion on April, 3. The International Bank rates also remain moderate, as it does not go about the expected 10% at all.

What are the reasons of such unexpected slack

?

   First and foremost, the windfall oil gains in March have overcompensated the effect of payments on external loans. Sure that the nominal growth of gold and currency reserves in March ($16,1 billion) looks about twice as much, than the real one, over

the exchange rate fluctuations. Nevertheless, the March contribution of the payments' balance to the liquidity inflow has become positive; and as CB does not buy the currency for the oil and gas funds of the Ministry of Finance yet, it can be estimated at RUR 180-190 billion.

   Second, the participation of the state corporations in the formation of the banking recourses has obviously increased.

We will remind that in November previous year the budget allocated RUR 550 billion to the capitalization of three established state corporations.

Earlier this year Bank for Development and Foreign Economic Affairs (Vnesheconombank) has stared to place the part of funds it received to increase the book value. Today RUR 115 billion is on the accounts of ten largest commercial banks.

The Russian Corporation of Nanotechnologies (RCNT) has also placed available funds in the amount of RUR 130 billion on the deposits of commercial banks. According to the statement of Kudrin, the housing maintenance and utilities fund would take the decision to place available RUR 240 billion temporarily. The part of them

would remain on the Bank of Russia deposits, and another part – in the state b onds which

would be purchased at the market, and this would provide with the additional liquidity inflow to the banking system.

   And finally, the Ministry of Finance could join the process of the bank funds increase with its almost "uncountable" balances of the accounts. Earlier, since 2004, all liquidity drops have been created in terms of only extremely obtuse technology

of budget implementation. It can finally become rather flexible now. We will remind that now all oil and gas profits of the budget (and these are huge sums; for example, RUR 371,2 billion in February) are allocated to provide the oil and gas transfer according to the current Fiscal Code.

This year the replenishment of the Reserve Fund, as well as the National Welfare Fund, continues later, when the whole budgeted transfer will be transferred. Up to this point unexpended budget funds can be considered temporarily surplus and the Ministry of Finance takes the opportunity to maneuver them.

   It is expected that the department would conduct the first auction to place the temporarily surplus funds on the deposits of commercial banks in mid-April. The volume of the temporarily placed surplus budgetary funds would be also determined by the mid-April.

As estimated by the Ministry of Finance, the potential of these surplus funds totals RUR 600 billion.

At the same time "the volumes of the specific sum can be determined significantly less also". The Bank of Russia takes the main decision here.

   Third, since August last year, when the terms of access to the external markets have been tightened, the constant strengthening of the banking multiplication, as well as "efficiency" of money generation by the banks, is observed.

As the result, despite the increase absence of the monetary basis from July to February, the growth rates of the deposit component of the money quantity did not almost drop, though the money quantity makes the main resource basis of the banks. As well as, despite the fact the Central Bank states the rates drop on deposits from the beginning of the year (without the Savings Bank).

   One of the reasons of the banking multiplication acceleration has maybe become the marked increase of the market segmentation and banks concentration at the credit activity. The market of the corporate crediting concentrates at the largest banks more and more (the stake of the top five grew up to 50%), and middle banks, from 21-200 group, are more active in the retail sector and have already managed to occupy 30% of this market.

   Fourth, the demand decelerations for loans, tightening of lending terms, and the rates growth to the final borrowers are marked. First of late the lending rates enter the positive area if we take into account the officially forecasted maximum inflation.

   Sharp loan reduction remains highly unlikely, while it is the only possible transmission channel yet that seized the financial world of "after-bubble" trust crisis and decline of tendency to the risk.

The substantial difference of Russia from many post-Soviet neighbors that are already aware of similar risks is the large positive current external balance and significant gold and currency reserves that provide with the much bigger space to use the external loans by the private sector.

Therefore, the most credible scenario for Russia is still the moderate tightening of lending terms, soft landing for the credit boom that is useful even from the viewpoint of "damping" of the inflation overheating.