Russia's Central Bank has been demonstrating significant moves in its financial policy. In early October, the Central Bank supported the Russian financial system with unprecedented amount of liquidity. In addition, sources do not rule out an opportunity for the Central Bank to purchase mortgage securities, as well as the infrastructure bonds. What will happen to the ruble?
On October 2nd, the Central Bank deposited over 1.11 trillion rubles in commercial banks as part of refinancing operations, which corresponds to more than 42 billion dollars. Such amounts have never been deposited before in one single day.
"Taking into consideration the fact that Russia's GDP is around $1.85 trillion, the transactions with liquidity account for 2% of annual GDP, produced by the whole country in a year," analyst of Kalita-Finance, Alexei Vyazovsky said.
One of the main problems of the Russian economy is the high cost of credit. It makes corporations and banks go west and receive credits there. The artificial shortage of money, which the Central Bank of Russia maintains, has long been one of the main reasons for criticism of the institution, whose activities would be often defined as sharply contradictory to national interests.
In addition, the Central Bank informed the media about the new ideas to form its assets through the purchase of Russian debt securities. As reported by Kommersant, "... the Bank of Russia considers investing in mortgage bonds ... The point of the idea is about the direct purchase of mortgage-backed securities by the Central Bank, which will allow banks to raise long-term funding from the regulator ...". The attention of the Central Bank to infrastructure bonds may become a much more important aspect. They can become a major source of long-term money in the Russian economy to finance large-scale projects.
According to its long-standing practice, the Central Bank of Russia keeps about 90% of its assets a foreign currency. In this case, the only channel of the emission of rubles is the purchase of foreign currency, mainly dollars, which makes the Russian currency dependent on the sale of raw materials for exports, which leads to the appearance of large amounts of foreign currency earnings.
If this state of affairs is not a form of colonial rule in its pure form, then one may speak about serious limitation of the fiscal sovereignty of the Russian Federation. This dependence leads to the fact that during the period of capital outflow, when it is the Central Bank that sells currency, the received rubles do not come back in the economy, which leads to another contraction of money supplies in the country.
According to the Central Bank, the net outflow during the first nine months of this year reached nearly $57.9 billion. In the 4th quarter, Russian companies and banks will have to pay $41 billion of debt to Western creditors.
The positive changes in the monetization of the Russian economy and the moves to refuse from the function of a privileged currency exchanger generate quite optimistic expectations.
"This is a serious bid for the emergence of sovereign emission in the country, which will not be dependent on the price of oil, gas, metals and currency flows into Russia," says Alexey Vyazovsky.
Deputy chairman of Russia's Central Bank Alexey Ulyukayev has recently said that the CB was planning to refuse from the currency band by 2015 with the transition to the policy of inflation targeting.
According to Mr. Vyazovsky, this will increase the value of the interest rate of the Central Bank of the Russian Federation in the national economy. Once the Central Bank refuses from the exchange rate band and reduces the presence of the Central Bank in the foreign exchange market, the ruble exchange rate will fluctuate against the euro and the U.S. dollar stronger and freer than ever before. And most likely, the ruble will have a significant potential for strengthening.
If all goes according to this scenario, analysts predict the strengthening of the Russian currency within two or three years to the level of 22-23 rubles per dollar. This will cause a blow to domestic producers, but in general, the Russian industry will win by improving the investment climate.