With its increasing integration into world financial markets, Russia has felt the effects of the international liquidity squeeze following problems in the U.S. subprime mortgage market. In mid-August, interbank interest rates in Moscow more than doubled in less than a week. The overnight rate has since averaged 6.15%, versus 3.59% earlier in the year.
Growth in bank assets has slowed markedly. In August and September, there were large capital outflows (although inflows have since resumed) and high oil prices cushioned the effect. Difficulties have been particularly pronounced at Russian Standard Bank, the country's No. 2 consumer lender, after state-owned giant Sberbank, which has cut back sharply on new loans.
Russia's Central Bank (TsBR) has taken a number of steps to ease liquidity conditions for the banking system. It began by offering a new "repo" facility for short-term lending against high-quality securities. This facility enabled an injection of large amounts of cash into the banking system in August, but banks found less need for it in September and October. This may be in part due to the TsBR's October decision to reduce reserve ratios for deposits temporarily, which enabled banks to use more of their cash for lending.
However, in late November, several new measures from the TsBR suggested increased urgency surrounding the liquidity crunch. Additional forms of short-term, collateralized lending were introduced, and the list of securities acceptable for repo operations was extended to include some Eurobonds and paper rated slightly lower than previously. The TsBR also ordered Sberbank to reduce its portfolio of government bonds, apparently in an effort to make these bonds available to other banks for use as collateral for TsBR lending.
The TsBR's burst of activity was evidently a reaction to a real tightening of conditions in the credit market. Although demand for TsBR lending regularly surges at the end of the month as tax and other payments come due, the November surge was exceptionally severe. Repo operations exceeded their record volumes of August, with little visible effect on spiking interbank interest rates.
The TsBR has not been fighting monetary battles on its own; as the crunch has worn on, the government has taken an ever more prominent role. Russia's budget spending tends to peak in December, as agencies rush to use up allotted funds. However, this year, Finance Minister Aleksei Kudrin attempted to bring spending forward to ensure that money withdrawn from the economy through taxation would return to it more quickly.
Government moves to implement plans for a range of development institutions designed to push infrastructural and high-tech investments have provided another opportunity to address monetary issues, as the start-up financing for the new institutions is removed from the Stabilization Fund (Stabfond) and deposited in the banking system. Thus, the Development Bank has recently deposited about 180 billion roubles ($7.4 billion U.S.) of its allocated funds. The enormous scale of this measure can be seen in the fact that liquidity (in the form of bank deposits with the TsBR) was 20% higher in the first week of December than in any week in the preceding four months. Interbank interest rates also plunged, although this development is common at the beginning of a calendar month, and may be temporary.
The government's ability to channel funds to the banking system is still far from exhausted. Other development institutions could deposit an additional 120 billion roubles from the Stabfond. Also, from January, legal changes will permit the deposit of budget system monies in commercial banks; these funds are presently held in Treasury accounts and do not contribute to banks' liquidity.
So far, the world credit crisis has not had a severe impact on Russia, thanks in part to a flexible and concerted response by the Russian authorities. The growing scale of foreign financing, which accounted for 23% of bank liabilities at the end of June 2007 (and has probably increased since), means the country will remain vulnerable to any further tightening on international markets. Yet state funds should prove sufficient to cushion most plausible blows.