14.10.07

Starting October 11, Russian banks will be able to withdraw from their Central Bank (CB) accounts approximately 100 billion rubles. Due to a crisis situation on the financial market, the Central Bank of Russia cut the minimum contribution to the Obligatory Reserve Fund (ORF) from 4-4.5% to 3-3.5%. Although, in the beginning of the next year the money will have to be returned: the rates are lowered only for three months. The current high inflation rate does not allow for the money to stay in circulation longer.

The last time the Bank of Russia cut the minimum reserve, from 7% to 3.5%, was during the height of banking crisis in 2004. Now the CB has lowered the rate by 1%, however the cut is effective for a limited term only. An official statement of the External and Public Relations Department of the CB explains that starting January 15, 2008 the “reserve requirement will be equal to the current rate”. Therefore, the new measure will only be effective for three months. The First Deputy Chairman of the CB called this reduction “a ‘bridging’ loan” and explained that, if, for instance, a bank withdraws funds on October 15th, it will have to return the money on January 15th, 2008.

According to the decision of the Board of Directors of the CB, the rate of required reserve for bank liability to individuals is lowered from 4% to 3%, and liability to non-resident banks in rubles and foreign currency, and also other liabilities – from 4.5% to 3.5%. On September 1st, 2007 the reserve of Russian banks amounted to 310.9 billion rubles.

The Central Bank’s decision will allow banks to use additional funds up to 100 billion rubles. The rate cut will free up approximately 71-77 billion rubles for banks to use. Additionally, a bank will be able to withdraw approximately 30 billion rubles from its corresponding account with funds accounted by the CB as reserve with averaging ratio. Starting November 1st the ratio is increased from 0.3 to 0.4, lowering the required minimum balance. In August 2007 the amount of finance counted as reserve equaled 118.9 billion rubles.

The CB statement announced that a decision on the liberalization of reserve regulations was made by the Board of Directors in expectation of banks’ increasing need for funds in the next few months. Bankers believe that these temporary measures of the CB focused on increasing liquidity will only help smaller banks. The financial need of larger banks will remain unsatisfied.

According to analysts, the Central Bank of Russia is not able to meet the growing demand for money due to high inflation. It explains why the announced rate cut is a temporary measure, and ORF was lowered by only one point, rather than two points as was expected by many.

However, the CB demonstrated its readiness to extend credit to individual banks. According to the First Deputy Chairman of the CB, regulator issued a six-month loan for 6.9 billion rubles to VTB at 7.5% annual interest on security of $0.5 billion credit claims to “Rosneft”. A similar loan will soon be issued to another large non-governmental bank. “The era of cheap money for banks is over, and banks will have to satisfy liquidity needs by such measures”, summarized the First Deputy Chairman of the CB.

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