March 13, 2016 — 2:00 PM PDT Updated on March 14, 2016 — 6:42 AM PDT
Russian central bankers have fewer reasons to offer relief to their recession-wracked economy than you might think.
Their decision whether to resume an interest rate-cutting cycle this week is almost beside the point as the government of Vladimir Putin lubricates the economy in the background with oil wealth amassed in better times. Russian banks are sitting on the most cash in five years, allowing them to lend to each other at a lower rate than they borrow from the central bank. In the euro zone and in the U.S., money market rates are higher than benchmarks.
“This amounts to easing of monetary conditions without key rate cuts,” said Alina Slyusarchuk, Morgan Stanley’s London-based economist for Russia and the Commonwealth of Independent States.
How did this happen? The Finance Ministry transferred 2.6 trillion rubles ($37 billion) of accumulated oil riches from the $50 billion rainy-day sovereign wealth fund into the economy last year to cover a fiscal gap. It’s budgeting another 2 trillion-ruble drawdown from the Reserve Fund in 2016. The influx of cash is allowing Russian banks to wean themselves off the central bank loans they were relying on to help them weather international sanctions. Those obligations fell to 1.57 trillion rubles as of March 10 from 7.8 trillion rubles at the end of 2014.
Since the Bank of Russia brought its rate-cutting cycle to an end on Sept. 11, the overnight money-market rate known as Ruonia has detached from central bank benchmarks, falling to 10.83 percent compared with an average 11.17 percent over the past six months.
In contrast to unprecedented stimulus measures by European peers, Russian central bank governor, Elvira Nabiullina, is expected to leave rates unchanged at 11 percent when she convenes policy makers Friday. The European Central Bank cut all its rates on March 10 and expanded its bond buying program by 20 billion euros ($22 billion) to 80 billion euros a month.
Unlike for Mario Draghi, easy conditions pose a threat to Nabiullina’s goals. She is still working to curb inflation of 8.1 percent, twice her medium-term target even after it fell from almost 17 percent a year ago. The governor is juggling the need to spur an economy that has been shrinking since the first quarter of 2015 against the risk of runaway inflation. Brent crude, used to price Russia’s main export blend, has averaged $34 per barrel this year compared with an average $86 the previous decade.
Rate VigilanceWhile the Bank of Russia has so far watched from the sidelines as money has flooded into the banking system, its ready to deploy tools to mop up a surplus of cash, a situation it said is “possible already in 2016.” The measures include restarting one-week deposit auctions to replace one-week repurchase agreements, making the central bank a borrower rather than a lender, it said in a response to questions from Bloomberg last week. Another option is to resume central bank bond sales.
“These instruments will allow the Bank of Russia to keep control over money-market rates,” it said.
In the meantime, the liquidity cushion will let Nabiullina delay rate cuts until the last three months of the year, Morgan Stanley’s Slyusarchuk said. Her forecast is more hawkish than 21 of 24 economists surveyed by Bloomberg. The median estimate of economists surveyed by Bloomberg calls for reductions of 1 percentage point by September.
Former central bank adviser Oleg Kouzmin estimates the liquidity surge is tantamount to a 50 basis-point rate cut.
“It may become an additional argument for less significant monetary easing this year,” said Kouzmin, who’s now an economist at Renaissance Capital in Moscow.