Russia’s central bank is adding 2 trillion rubles ($58 billion) to a program aimed at tackling a cash shortage among lenders that has worsened this year as bond markets cut off borrowers.
The Bank of Russia expects lenders will need 7 trillion rubles to help meet refinancing needs through year end, Chairman Elvira Nabiullina said at a news briefing in Moscow yesterday. That’s up from a previous estimate of 5 trillion rubles in 2014, which was surpassed by June 1, according to the regulator.
Russian lenders have become more reliant on the central bank for funding as foreign investors dumped the nation’s assets, deterred by the escalating crisis in Ukraine, which also choked off borrowers’ access to global debt markets. Central bank loans comprised 8.2 percent of the banking industry’s funding as of June 1, an increase from 5.4 percent at the start of 2013, the data show.
“The central bank is doing all it can to alleviate the liquidity shortage,” Vladimir Osakovskiy, the chief economist for Russia at Bank of America Corp., said by e-mail yesterday. Russia “can root out the problem” only if it stops accumulating money in sovereign wealth funds and takes more steps to develop local financial markets, he said.
Net capital outflows from Russian assets climbed to $49.3 billion in the first quarter, the highest since the fourth quarter of 2008, Nabiullina said. Outflows amounted to $16.2 billion in April and May and may reach as much as $90 billion for the whole year. The central bank held its key interest rate at 7.5 percent yesterday.
To boost longer-term funding, the central bank introduced a refinancing instrument at a rate of 6.5 percent for as many as three years, with loans for investment projects eligible as collateral, Nabiullina said. It has also increased the amount of funds it provides for three months with non-marketable assets as collateral, she said.
The Bank of Russia “has to introduce measures that are atypical for central banks to provide medium-term and long-term liquidity,” Nabiullina told reporters yesterday. A combination of lower deposit growth, $46 billion of interventions in the foreign-exchange market between January and May 8 and curtailed access to global debt markets have “negatively affected the liabilities of the banking sector,” she said.
While Russia’s economy faces the slowest growth since the 2009 recession, loan demand is increasing because of “the considerable worsening of the Russian companies’ access to the external debt market,” Nabiullina said.
Corporate lending climbed by 17.5 percent in the 12 months to May, up from 12.7 percent at the end of last year, she said. Russian companies sold less than $2 billion of bonds from March to May, down from $19 billion in the year-earlier period, according to the governor.
Policy makers have come under pressure to expand the list of assets accepted as collateral for loans, with Herman Gref, chief executive officer of OAO Sberbank, saying steps were needed to address the “acute” shortage of long-term ruble funding. Sberbank is the largest lender in developing Europe, the Middle East and Africa.
If measures aren’t adopted, banks would be forced to raise interest rates to stem demand for credit, Gref said on June 6.
The cash situation and the central bank’s response raises the question of whether interest rates are artificially low, Vladimir Kolychev, chief economist for Russia at VTB Capital in Moscow, said in an e-mailed note.
“The central bank cannot indefinitely increase the share of its lending in banks’ funding sources,” Kolychev said by e-mail. “Higher interest rates should ultimately enforce themselves whether the regulator wants it or not as banks start to fight for depositors.”
While lending growth will outpace bank funding, the gap is narrowing and the central bank may not draw on the entire 7 trillion rubles, he said.
Recent attempts by Russia and Ukraine to implement a peace plan enticed OAO Alfa Bank, Russia’s biggest privately owned lender, back to the market this month with a 350 million-euro ($475 million) offering of three-year debt. Tensions in Ukraine worsened over the weekend after 49 people were killed when pro-Russia fighters shot down a military plane.
OAO Lukoil said yesterday it delayed a plan to sell $1.5 billion of Eurobonds. Sberbank intends to sell about 1 billion euros of debt with a maturity of at least five years, a person with knowledge of the offering said last week, asking not to be identified, citing a lack of authorization to speak publicly.
“Sberbank is between Scylla and Charybdis,” Olga Naydenova, an analyst at BCS Financial Group in Moscow, said in e-mailed comments yesterday, using an idiom based on Greek mythology to capture the choice between two evils. “A regular bank facing a slowing economy tightens risk-management and slows down lending growth. Sberbank has to at the same time improve risks and not let lending freeze.”