Elvira Nabiullina_Governor of The Bank of Russia

The Central Bank of Russia takes urgent measures to paliate Ruble’s fall, national reserves freeze and SWIFT exclusion: Some comments on how effective the counter measures may be

The coordinated activation of economic sanctions by the the European Union, the USA and other countries is destabilizing the Russian economy sooner than expected. To the downing tendency experienced in the first days of February it adds the hard sink experienced in the latest days, specially after the last tranche of the economic sanctions started to be applied today.

Today the Ruble missed a 12.53% of its value plumbing down to the €0.000943 for 1 Ruble. Taking into accout the evolution from 23 February to 28 February the Russian currency sank down loosing around a 16% of its value related to the Euro. When it comes to the US dollar, the value of the Ruble went down a 12,3% today and a 17.04% from 23 February.

The volatility of the Ruble is not the only problem triggered by the economic sanctions. The freeze of the reserves of The Central Bank of Russia denominated in Euros and Dollars (aggravated by the fact that the President Biden has banned all trade with this central bank) and the exclusion of some Russian banks from the SWIFT have also added its grain of sand to the lack of liquidity of the banking system in Russia.
And so was recognized by Elvira Nabiullina (Governor of The Bank of Russia), who added another problem, the inflation risk triggered by the depretation of the Ruble and (she doesnt say it ) the international ban for foreign companies from the countries imposing sanctions on commercial operations in Russia or with companies or several Russian nationals.

Russia enjoys one of the lowest debt levels in the world at just 20% of GDP, and nearly $650Bn of currency reserves, but both Standard and Poors and Moody’s warned they would downgrade their credit rating for Russia. And they did it just unveiled the sanctions, even before these measures were effective.

Geopolitical risk and fear of Russian debitors will not be able to pay back with the Russian financial institutions isolated from the international trade system are the main reasons why the rating is likely to be downgraded from stable (Baa3 by Moody’s and BBB from Fitch) to junk or even to the sub investment category.

Key rate at historic maximums to control inflation

In her video speech of this afternoon Nabiullina announced the rise of the interest key rate to the 20% and other measuers to stabilize the economy of her country:
“Good afternoon, today The Bank of Russia has made the decision to raise the key rate to 20% per annum. The conditions for the Russian economy have altered dramatically . The new sanctions imposed by foreign States have entailed a considerable increase in the Ruble exchange rate and limited the opportunities for Russia to use its gold and foreign currency reserves. Accordingly, we need to employ a wide range of tools to maintain financial stability.

The dynamics of the exchange rate is an additional pro-inflationary factor that affects the current product prices and causes a drastic rise in devaluation expectations and inflation expectations. In order to support the attractiveness of deposits and protect household savings against depreciation, we need to raise interest rates to the levels that would compensate for higher inflation risks for people.

We will make further decisions on monetary policy depending on actual developments and the assessment of risks primarily related to external conditions. Our monetary policy will be aimed at maintaining financial and price stability.”

The measures described deserve some comments.

Sure that elevating the interest rate may control the sink of the Ruble exchange rate but not for a long time and this elevation of the interest rate have an impact in floating rate loans in Rubles. The Governor of The Central Bank of Russia says below why this institution considers that the translation into insovency risks of the rise on the interest of floating interest loans is limited in Russia.

Other measures: providing cash and non cash Rubles to banks

“Now I would like to speak on other measures we are currently implementing, Nabiullina added, ” Today, Russia’s financial system and economy are facing a totally abnormal situation and The Bank of Russia will use any necessary tools very flexibly.
As regards the banking sector liquidity, The bank of Russia is continously providing cash and non cash Rubles to banks.

Due to the high demand for cash, the banking sector is now experiencing a structural liquidity deficit. Banks have sufficient collateral to increase the amount of liquidity raised from The Bank of Russia .
Speaking of the foreign exchange market, The Bank of Russia carried out fx interventions totaling $1Bn on Thrursday and in a smaller amount on Friday.

Considering the restrictions on using the golden foreign currency reserves in Dollars and Euros we have not carried out interventions today.

The Government has announced the decision obliging enterprises to sell 80% of their export revenues. This measure will help ensure an even supply of foreign currency in the domestic facts market to meet importers and households needs.”

This latest measure deserves some comment, as the forced facts endorsement (sale) before the date they must be paid by the debitor usually have a cost for the company that endorses them (those are paid under the nominal value of the fact). Besides, all these facts are denominated in external currencies, usually Dollars, and the companies are obligued by The Bank of Russia to receive Rubbles for them. Rubbles, which value is going down day by day.

Other measures: limiting the withdrawal of capital and the sale of securities by non nationals

“Moreover,” she continued, “The Bank of Russia is taking a range of steps towards limiting the withdrawal of capital by non residents and the sale of Russian securities by them.

We are continuosly monitoring on exchange trades and taking appropriate meassures when needed. Specifically the restrictions on security sales by non residents have already been introduced.”

Many foreign companies have already announced that they are leaving their participations in the capital equity of Russian comapanies. Among them British Petroleum (bp) has already done it.

The measure described above make for them impossible for the foreign companies to selling their share titles in the Russian companies in the open market. Perhaps that’s why bp told about a change in accounting related to its participation in Gazprom avoiding the term sale on their communication.

The ban on security sales for non nationals is a measure aimed to preserve the value of the shares of the Russian companies derived from a massive offer of titles as the foreign investors try to leave their interests in the country.

The Moscow stock exchange have been closed today (suspended all trade) by the Russian Economic Authorities. This measuer os part of the same effort topreserve the trade value of the shares of Russian companies.

Other measures: relaxing the obligation to update the valuation of assets and the obligation to feeding provisions

“We are constantly in touch with banks and are prepared to promptly take all necessary measures to support them, in particular we have already introduced a number of regulatory relaxations and we will further monitor banks needs in mechanisms that will support their operations in the new conditions.

We have allowed banks not to re-evaluate their investment into securities as well as foreign currency assets and liabilities for calculating capital adequacy rates. This will help banks gradually adequate to the new environment.

We will not enforce the banks sanctioned by foreign States comply with open currency position limits.

We have implemented a number of meassures allowing banks not to increase their provisions during the year.

As part counter-cyclical micro-prudential policy we have released the accumulated buffers of all long types, including foreign currency loans to companies and household loans. These meassures are equivalent to an increase in bank’s capital by 900Bn Rubles,” Nabiullina explained.

Again, this measure deserves some comment. All of them relate to accounting, and this means that are increasing the risk for insolvencies, both in the financial and not financial sectors, as well as providing a image of the economical value and circumstances of the companies that are far from their real positions.
The release of the buffers, may provide aditional liquidity in the short term but is not a long haul solution to the problem. The more that the sanctions and the war in Ukraine last, the least this measure will be actually effective.

Other measures: supporting bank clients financial capability through credit

“In such a situation, it is critical to support, not only banks but also their clients,” the Governor of The Central Bank of Russia points ” As a result of the imposed sanctions hosuseholds and companies are also experiencing a deterioration on their financial positions. In this regard, we recommend that banks should meet the needs of their clients approving loan restructuring without imposing any penalties and fines on that loans. This is essential for both retail and corporate loans. Furthermore, banks are allowed not to decrease their assessments of a borrower’s financial standing and debt servicing quality.

Following the key rate increase payments on loans at floating rates grow as well. There are almost no such loans in the retail segment. Absolutely not such loans in mortage and a minimum number of them in the consumer lending and I would like to enphasize that banks may not change conditions on the current loans issued at current fixed interest rates.

There are no floating rates in the retail lending, however banks have been actually increasing the portion of such loans in the corporate segment in recent years in order to limit their interest rate risk.

Nevertheless we assess the risk of a potential transformation of the interest rates into credit risks as limited.
Generally such loans are raised by large companies, with high credit worthiness. If a borrower is facing hardships with a loan at a floating rate and the bank is ready to restructure such a loan, we are also prepared to grant regulatory easing of provisions.”

Again these releases of buffers may provide liquidity in the short term but elevate the risk of economic derailing if the loans finally cant be repaid by a huge number of debitors or a certain number of debitors engaged under large loans.

Other measures: supporting bank clients financial capability through credit

“In the current situation it is crucial to mantain the potential for lending both to households and businesses,” Elvira Nabiullina (the Governor of The Central Bank of Russia) underscored, and she continued explaining: ” In crisis conditions banks tend to shift towards conservative approaches and slowdown lending. Therefore we have already provided relaxation to banks by suspending the limit on the total cost of a consumer loan.

Furthermore, the Bank of Russia will soon adjust the macro prudential buffer for unsecured and mortgage loans and will only leave the buffers for the riskiest loans that is, loans with the highest total cost of credit, high payment to income ratios and mortgages high loan to value ratios.
As to all other loans we are going to cancel the buffers in order to support the affordability of lending.

All banks are fulfilling and we are going to fulfill all obligations to their clients. All funds in client’s accounts are preserved and all transactions are available to clients.
We have granted regulatory easing to insurers and professional securities markets participants,moreover we will consider other relaxations to guarantee the fulfillment of all obligations to their custommers.”

Again this measures deserve some comment.
The release of the buffers may provide liquidity in the short term, but increases the risk for insolvencies. The more that the sanctions last the worse the situation will get.

Other measures: using SPFS instead of SWIFT to paliate exclusion of several Russian banks fromthe SWIFT code

“We have been developping the domestic financial infrastructure. It will continue to operate smoothly. Namely, we have the financial messaging system FMS (known as well as SPFS) that can replace SWIFT inside Russia and allows the connection of foreign participants to it. The National Payment Card System processes the entire traffic on payment cards inside Russia. International payments systems cards issued by the sanctioned banks will continue to operate inside Russia as normal,” assured the Governor of The Central Bank of Russia.

I have already commented in the post published on Eastwind about the latest tranche of economic sanctions agreed by the USA and the European Union that the change of the SWIFT for the FMS probably will have a very limited effectiveness to guarantee the seamlessly flow of international payments (find a link to this article at the end of this post).

Set up by The central Bank of Russia in 2014, the SPFS aims to replicate the functions of the Brussel based interbank transfer system (SWIFT). In 2020 traffic using SPFS doubled to ca. 13 million messages, but of the 400 financial institutions, who had joined the Russian system most were Russian. None of the key foreign banks operating in Russia (UniCredit, Deutsche Bank or Riffeisen Bank) had not joined the SPFS. Currently just 20% of all domestic transfers are carried out through the Russian SPFS. And caption of foreign members has been hard to date for it. The SPFS use is no way as widespread as that of the SWIFT (11,000 members).

But The Central Bank of Russia could decide to turn the SPFS into compulsory both for Russian and foreign banks trading with Russian entities. In fact there was an attempt to do so in 2019.

Avoiding investors, companies and citizen’s panic, above all

“The Bank of Russia will implement all necesary measures to maintain financial and price stability, support the Russian financial sector and protect the welfare of citizens an the economy in general. Thank youfor your attention,” Nabiullina concluded.

The Governor of The Central Bank of Russia keeps on saying that all Russian banks are able to fulfill their obligations, that banking operative with citizens is normal and that there’s no ban on cash withdrawals for nationals. Because there is a nother risk for theRussian economy and financial system, not related to the sink of the exchange rate of the Ruble. And that is the panic of investors and clients.

The image of Russians queing before the cash dispensers (ATM) of the banks is the faithful picture of the mentioned panic.
Who in the earth could avoid the Autorities to impose in Russia an Argentinian so called “corralito” if needed?.

Note for our readers: This transcription has been taken by Eastwind from the video published by the Press Department of The central Bank of Russia in the bak’s channel on You Tube.

Image over the headline.- Elvira Nabiullina (Governor of The Bank of Russia). Caption of the video published on The Bank of Russia’s channel in You Tube.

Related external links:

Speech by Elvira Nabiullina, Bank of Russia Governor, in follow-up of Board of Directors meeting on 28 February 2022

Russians queuing before bank ATMs

Related Eastwind links:

The United States and EU Commission commit to exclude several Russian banks from the SWIFT inter banking code system: Devastating effects on Russian economy but not at no no cost

British Petroleum exits Rosnef capital equity and Board

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