The Bank of Russia's BoD adopted a decision on Monday to amend mandatory reserve rates for lending institutions. Starting July 1, 2007, the mandatory reserve rate on liabilities to non-resident banks in rubles and foreign currency and other liabilities of lending institutions in foreign currency was set at 4.5% and liabilities of lending institutions to individuals in rubles at 4%.
CBR said in its press release that the current situation is characterized by ongoing strong capital inflow in Russia, which makes it necessary to take measures aimed at reducing the possible inflationary repercussions associated with this process. In such a situation, the Bank of Russia's BoD adopted a decision to hike mandatory reserve rates which is in line with international monetary regulation practice in such situations.
For the record, the last time CBR raised mandatory reserve provisions was on October 1, 2006 for liabilities of lending institutions to non-resident banks in rubles and foreign currency (from 2% to 3.5%) and made them equal to the rates for all the other types of liabilities.
We believe that CBR's decision is attributable to strong capital inflow in Q107. According to Sergey Ignatiev, net capital inflow amounted to $13 bln in Q17. This is primarily due to large borrowed financing raised to bid in Yukos liquidation auctions (Rosneft alone raised $22 bln for that), flotation of Sberbank's additional share issue and then VTB's IPO. Needless to say, such huge capital inflow again urges CBR to do a balancing act between ruble appreciation and inflation. The international currency reserves grew $65.385 bln in January-April or up 21% YTD. Q107 money supply growth accelerated to 4.6% YTD which outpaces Q106 result (2.0%) and Q105 (2.6%). This started to exert inflationary pressure on the economy. In Q107, inflation dipped y-o-y, while in April we saw an opposite trend and CPI was higher than in April 2006.
Thus, CBR is attempting to ensure that the inflation target (no more than 8% in 2007) is met and at the same time to avoid real ruble appreciation (Russian President Vladimir Putin repeatedly disapproved of this trend). For the Bank of Russia this means the need to limit money supply using non-exchange rate methods, i.e. by raising interest rates for deposits at CBR and mandatory reserve provisions. However, a rise in deposit rates which has several times been implemented by CBR since 2006 has led to an additional inflow of foreign speculative capital on the part of non-residents. This could be the reason why CBR opted for higher mandatory reserve rates. In the process of fulfilling the task of reducing inflation and curbing ruble appreciation, the Bank of Russia has been attempting to make the terms of raising borrowed resources less profitable for banks and on the other hand, encourages raising personal deposits by setting lower reserve provisions on them.
In our opinion, CBR's measures could somewhat reduce speculative capital inflow in Russia and ease inflationary pressures. However, this step could have moderately negative repercussions for domestic liquidity, margins of banking operations and indirectly for the stock market. We do not rule out that repercussions of tighter monetary policy will appear when capital inflow in Russia plays itself out and lower banking liquidity exerts additional pressure on the stock market.
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