Draining Ruble Glut Heralds Central Bank’s First Loss Since 1998

  • Bank of Russia plans to pay lenders to soak up excess of cash
  • Policy makers expect liquidity surplus will last three years

Not since 1998 has Russia’s central bank booked a loss, but that may be about to change.

The bottomline will suffer because the Bank of Russia is becoming a net borrower from lenders for the first time since 2011 as deficit spending by the government sends rubles cascading through the system, according to VTB Capital and Renaissance Capital. Policy makers are now preparing to pay banks to soak up the excess cash and avoid spillovers into inflation.

The money presses at the central bank have been churning out rubles as the government converts foreign currency from one wealth fund and prepares to unseal the other to navigate three more years of budget deficits. To manage a liquidity surplus it expects from early 2017, the Bank of Russia is now teeing up measures that include deposit auctions and sales of short-term bonds, costlier operations that will be a drain on its results.

“A liquidity surplus is a function of the state of the budget,” Alex Isakov, an economist at VTB Capital, said by phone. “If financial results become negative, even very negative, that would be a consequence of the longer time it takes the budget to adjust.”

The liquidity glut has pushed money-market rates below the central bank’s benchmark. The Ruonia overnight rate fell below 10 percent in late June and reached 9.93 percent on July 4, the lowest since December 2014. It’s averaged 10.8 percent this year, down from more than 17 percent at the start of 2015. The central bank has cut its benchmark once in the past year, lowering it to 10.5 percent in June.

The government, already running its widest deficit since 2010 this year, has transferred 2.6 trillion rubles ($40.6 billion) from the Reserve Fund into the economy in 2015 and injected a further 780 billion rubles this year, or more than a third of the plan for 2016. The Finance Ministry wants to keep the fiscal gap at 3.2 percent of economic output in 2017, reducing it by one percentage point each year to balance the budget by 2020.

The central bank has racked up 1.5 trillion rubles in profits since it last lost money, even eking out a small net income when the financial system was in surplus in 2011. It channeled 75 percent of the profit into the budget in 2010-2015, and last year another 15 percent was transferred to state development lender Vnesheconombank.

‘Long Time’

The Bank of Russia recognizes that its profit may decline or even a slip into a loss as liquidity shifts into surplus, according to an e-mailed answer to questions. However, the central bank said any impact will be limited and it’s able to absorb possible losses for a “long time.”

As a research paper published by the European Central Bank suggested this year, policy makers can’t run out of that which they create.

To postpone a liquidity surplus, the central bank has already sold more than two thirds of the 207 billion rubles in government bonds it held at the start of the year. It’s also raising reserve requirements on lenders’ local-currency liabilities for the first time since Governor Elvira Nabiullina took up her post in 2013.

“Under forecasts, we’ll swim in this excess of liquidity for three years,” First Deputy Governor Dmitry Tulin said last month in St. Petersburg. “That’s why it’s necessary to learn to swim in this pool.”