By Scott Rose
Russia’s central bank refrained from cutting interest rates as Europe’s debt crisis exacerbates a cash shortage in the economy, putting pressure on policy makers to keep a grip on capital outflows.
The central bank left the refinancing rate at 8.25 percent after two increases this year, as predicted by all 24 economists in a Bloomberg survey, Bank Rossii said today in Moscow. Tighter lending conditions and a liquidity shortfall will likely “remain for the medium term,” the bank said.
Lenders in eastern Europe may face a credit squeeze as banks further west withdraw cash from the region to cope with the European debt crisis, Christine Lagarde, the International Monetary Fund’s managing director, said Nov. 7 in Moscow. The Russian regulator has signaled it may limit operations between domestic lenders and foreign banks.
“Policy makers are becoming increasingly worried about a liquidity squeeze in the banking sector,” Neil Shearing, a London-based senior emerging-markets analyst at Capital Economics Ltd., said by e-mail. “The problem for the central bank is that cutting interest rates significantly would risk stoking capital outflows, thus intensifying the liquidity squeeze facing banks.”
The government of Prime Minister Vladimir Putin, who plans to return to the Kremlin next year, has been battling to staunch capital flight that may reach $70 billion this year, compared with a previous forecast for $36 billion of outflows, according to the central bank.
Bank Rossii is “very concerned” about capital outflows that hit $64 billion in the first 10 months, Chairman Sergey Ignatiev said last week.
The ruble kept declines against the dollar, depreciating 0.5 percent to 31.6150 at 6:18 p.m. in Moscow, heading for its weakest closing level since Oct. 7. The Russian currency has fallen 2.5 percent against the dollar this week, bringing its loss since the end of July to almost 13 percent.
The ruble’s depreciation since August may fan price growth next month as commodity exports power economic growth above 4 percent, which “isn’t bad,” Ignatiev has said. Inflation was 7 percent on Nov. 21 from a year earlier, compared with 7.2 percent at the end of October, according to the central bank.
Lowest Since 1991
The world’s largest energy exporter is trying to cap inflation at 7 percent, which would be the lowest year-end level since the Soviet Union collapsed in 1991. Putin is seeking to keep price growth from eroding purchasing power before parliamentary elections next month and presidential polls in March.
The central bank signaled today that a shortage of cash in the banking system will probably continue.
Russian units of foreign banks including UniCredit SpA (UCG) have started lending excess cash to their parents since the middle of the year amid the euro region’s turmoil, using “central bank liquidity” and funds from their Russian operations, Deputy Economy Minister Andrei Klepach said Oct. 27.
Bond yields in Italy and Spain have soared on concern their debt levels may force them to join Greece, Ireland and Portugal in seeking international aid. Italy’s 10-year notes yielded 7.11 percent yesterday after rising 47 basis points this week.
Italian Debt Sale
Italy sold 8 billion euros of six-month Treasury bills, the maximum target. The Rome-based Treasury sold the 183-day bills to yield 6.504 percent, up from 3.535 percent at the last auction on Oct. 26. Demand was 1.47 times the amount on offer, compared with 1.57 times last month. The country’s bonds extended their decline after the sale.
Earlier, Spanish two-year notes slid, pushing the yield to more than 6 percent for the first time since the euro was created in 1999. The rate climbed as high as 6.12 percent and was at 6.06 percent.
German two-year debt rose for the first time in three days as Belgium’s de Tijd newspaper reported European Central Bank Governing Council member Luc Coene as saying the central bank may cut interest rates given the current situation.
The cost of insuring against default on European financial- company debt rose to a record, according to traders of credit- default swaps.
Of the 10 Russian banks with the most foreign transactions, seven are subsidiaries of Western banks, Alexander Vinogradov, an official at the central bank’s regulatory and oversight department, told reporters in Moscow yesterday.
“We’re concerned about that from the liquidity standpoint,” he said, adding that the operations are “drying up” Russia’s money market.
The central bank has been monitoring foreign lenders’ subsidiaries since a credit squeeze that began in late 2008, he said. Among the biggest foreign lenders with local subsidiaries are Societe General SA through its OAO Rosbank (ROSB) unit, UniCredit, Raiffeisen Bank International AG (RBI) and Citigroup Inc. (C)
Foreign banks “facilitated” capital flight three years ago during the country’s record economic slump, Putin has said.
Bank Rossii met with the subsidiaries of western European banks over the past few weeks to order them to limit lending to support their parent companies in dealing with Europe’s debt crisis, Kommersant reported today. Vladimir Lavrov, a central bank spokesman, said he had no information on the matter.
Russia’s largest deposit-taking banks are now paying households an average of 9 percent on their top ruble deposits, up from 7.88 percent in mid-November, according to central bank data. The rising rates paid by lenders are a “direct indicator that banks have a problem with liquidity now,” according to Konstantin Nemnov, a portfolio manager at TKB BNP Paribas Investment Partners who helps manage 22 billion rubles in debt.
“If there were more liquidity, it would clearly assist our work,” he said today by telephone from St. Petersburg. “The negative pressure on interest rates will continue regardless because of the capital outflows.”
Budget spending at the end of the year, traditionally a source of ruble weakening, is unlikely to ease the liquidity crunch, Clemens Grafe, chief economist at Goldman Sachs in Moscow, said in a telephone interview today. He forecasts no lending-rate changes until the second-quarter of 2012.
The budget surplus widened to 3.2 percent of economic output in the year through October, or 1.4 trillion rubles, according to Finance Ministry data. More than 60 percent of the amount, or 896 billion rubles, has already been placed with Russian banks through the ministry’s deposit auctions, according to Bank Rossii data.
“The budget can basically finance its spending out of the deposits that they already hold with commercial banks, which they didn’t have in the past,” he said. A “healthy” surge in repo demand over the past two months is being driven by the budget policy and also “there have been big banks that overcommitted themselves on the lending front.”
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