Russian Central Bank Ramped Up Debt Sales Last Month to Counter Stimulus

Russia’s central bank ramped up debt sales in March, selling 339.7 billion rubles ($11.6 billion) of bonds to absorb excess liquidity and counter the inflationary impact of the government’s anti-crisis package.

Bank Rossii’s outstanding debt jumped more than 50 percent in March from the previous month to 735.9 billion rubles from 487.9 billion rubles at the end of February, the bank said in a report on its website today.

The regulator is seeking to offset a surge in stimulus spending pumped into the economy to steer a recovery from the worst slump since the Soviet Union collapsed in 1991. Output fell 7.9 percent last year and the government raised expenditure by 27.3 percent. M2 money supply jumped an annual 32.1 percent in March after a 29.5 percent advance in February. Finance Minister Alexei Kudrin on April 6 warned the stimulus may trigger faster inflation and bring an end to interest-rate cuts.

“With the latest tax payment period over, we expect a substantial liquidity inflow in the coming days,” Trust Investment Bank in Moscow said in a research note today. “The beginning of May will see a large chunk of budget spending -- currently the main source of additional liquidity.”

The government, which expects to run a deficit of 6.8 percent this year, last month transferred the equivalent of 350 billion rubles from the Reserve Fund, one of its two sovereign wealth funds, to finance the shortfall, the Finance Ministry said today.

Anti-Crisis

The ruble strengthened in April against the dollar for its fourth month of gains, the longest stretch of increases since a rally ended in August 2006, and rose against the euro for the seventh month out of the last eight. The Russian currency today retreated 0.8 percent to 29.4024 per dollar at 3:32 p.m. in Moscow and rose 0.8 percent to 38.5995 against the euro.

Russia spent more than 3 trillion rubles last year on anti- crisis measures, including state guarantees on loans and funds earmarked to support the financial industry by the central bank, Prime Minister Vladimir Putin told lawmakers on April 21.

The deficit widened in March as the government boosted spending, reaching 307.6 billion rubles, or 3.2 percent of gross domestic product, from a shortfall of 194.6 billion rubles in February, Finance Ministry data show.

“We have so much liquidity now, we might get flooded,” First Deputy Chairman Gennady Melikyan said on April 20.

Lending to households rose 0.3 percent in March, compared with a decline of 0.6 in the previous month, the bank said last week.

Lending

Banks continued to invest in securities while individuals increased savings in March, Bank Rossii data show. Lenders invested 3.89 trillion rubles in debt obligations and Russians’ deposits rose 1.6 percent in the month, compared with a gain of 2.3 percent in February.

Lending may grow 15 percent in 2010, central bank Chairman Sergei Ignatiev said last month. Inflation, the slowest in 12 years in March at 6.5 percent, is set to accelerate and Bank Rossii has signaled it may start raising rates in the second half.

An increase in bank lending to households and businesses may also prompt the regulator to start tightening policy. Bank Rossii has indicated it may withdraw liquidity by forcing lenders to raise reserve requirements to pre-crisis levels.

Consumer-price growth may accelerate in the second half, the bank said last week, adding that a “more detailed analysis” of the pace of inflation would be required before further changes in policy rates.

The bank last week cut its main interest rates for the 13th time in a year, lowering the refinancing rate a quarter point to 8 percent.

To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net.

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