Translated material
Interventionists Ignatiev and Kudrin
Russia begins to actively spend financial reserves
In September and October, the Central Bank spent $57.5 billion to support the ruble exchange rate . The head of the Bank of Russia, Sergei Ignatiev, spoke about this yesterday in the State Duma. According to market participants, the regulator will need the same amount in the last two months of the year to keep the national currency from devaluing. Next year, judging by the statements of the monetary authorities, we cannot expect an improvement in the market situation. According to Deputy Prime Minister and Finance Minister Alexei Kudrin, the size of the reserve fund in 2009 could be reduced by half a trillion rubles if oil prices remain at $50 per barrel. The funds accumulated by Russia in the Reserve Fund during the period of high oil prices, Mr. Kudrin believes, should be enough for at least seven years, if no more than 500 billion rubles are spent. annually. Experts also believe that the Russian monetary authorities will have to actively spend the reserves accumulated over the years of the oil boom to maintain the national currency and patch up budget holes from the decrease in foreign exchange earnings to the treasury. So the vaunted “airbag” that the Russian authorities love to talk about will become thinner and thinner.In addition to the discussion in the Duma, another meeting was held yesterday - this time at the residence of President Dmitry Medvedev near Moscow, also dedicated to the situation in the country in connection with the global financial crisis. The details of what happened there are unknown, but this meeting is notable for the fact that the Prime Minister took part in it. Until now, Vladimir Putin has preferred to discuss economic issues with the president one-on-one. At the meeting, the discussion was “about the economic development of the country, taking into account the consequences of the global financial crisis and measures to overcome it, including in the context of the upcoming congress of the United Russia party,” explained presidential press secretary Natalya Timakova (as you know, speeches are planned at this congress both the president and the prime minister leading the party).
Yesterday, deputies invited the ministers of the economic bloc of the government and the chairman of the Bank of Russia to the State Duma in order to find out how the authorities intend to manage gold and foreign exchange reserves and the funds of the Stabilization Fund in a crisis.
The head of the Central Bank, Sergei Ignatiev, explained to parliamentarians why gold and foreign exchange reserves decreased by $97.6 billion in September-October. According to him, this is due to the maintenance of the ruble exchange rate, as well as the revaluation of reserves due to the rise in the dollar exchange rate against the euro and pound. Over these two months, the official dollar exchange rate rose by 10% - from 24.57 to 27.09 rubles. Obviously, the value of the currency on November 1 would have been higher if the Central Bank had not carried out interventions, for which, as Mr. Ignatiev admitted, he spent $57.5 billion.
“In the last two months, the Central Bank has spent too much money from its gold and foreign exchange reserves to maintain the ruble exchange rate,” believes Tatyana Orlova, an economist at ING Bank. -- Taking into account current oil prices, as well as the demand for dollars within Russia, we can say that the Central Bank will have to continue to use reserves to prevent a sharp devaluation of the national currency. “I believe that in the last two months of this year the Central Bank will have to spend approximately the same amount of money on currency interventions as in September-October.” According to Ms. Orlova, with a favorable forecast (the cost of Brent oil is 60-70 dollars per barrel), by the end of the year the dollar exchange rate will rise to 28.2 rubles. If the current situation continues (oil price is about $50 per barrel), we should expect the US currency to rise in price to 29 rubles.
Russian authorities claim that there will be no sharp devaluation of the ruble. According to presidential aide Arkady Dvorkovich, there will be no devaluation of the ruble even with low oil prices. “Today oil prices are lower than everyone expected and than we expected. Therefore, a slight depreciation of the ruble occurred,” says Mr. Dvorkovich. He does not exclude the possibility that some changes in the ruble exchange rate are possible in the future if the price of oil remains low.
Despite these assurances from the authorities, Russians continue to transfer their savings from rubles to dollars, largely due to the high demand of citizens, the owners of exchange offices set the purchase rate for cash currency significantly higher than the official one. Rates on ruble loans will also rise. In the context of a weakening ruble, rates on ruble loans should be high, says the head, Mr. Ignatiev: “If we expect inflation this year to be 13-14%, then the rates should be 14, 15 and 16%, and this is for good borrowers, for others they may be 17-20% or higher.”
We should expect an increase in interest rates by those banks that took subordinated loans from Vnesheconombank. As Mr. Kudrin said yesterday, the Ministry of Finance plans to change the rate from fixed to floating: “In the near future we will change the principles for setting the rate; it will be floating and will depend on the market situation.” And since market rates are rising, bank loans will be more expensive than they are now (while the loan rate is 7% per annum).
Low oil prices force not only the Central Bank to spend; the Ministry of Finance may spend 500 billion rubles next year. from the Reserve Fund, the size of which so far exceeds 3.5 trillion rubles. “We have a minimum of reserves for a period of seven to 15-20 years, depending on what the real economic growth rate will be and how we balance the budget,” Mr. Kudrin noted. If next year oil prices remain at $50 per barrel, then the state will lose not only oil revenues, but also all other revenues, since the rate of GDP growth slows down. Therefore, the use of the Reserve Fund may be higher than it would be only if oil and gas revenues decreased. “According to our preliminary estimates, this could be 200 or 400 billion rubles. next year,” Mr. Kudrin said, not ruling out that support for the regions next year will be provided at the expense of the fund.
Tatyana Orlova's assessments are more pessimistic. In her opinion, with an oil price of $50, Russia will have to spend about 1 trillion rubles from the Reserve Fund.
The Minister of Finance also spoke about the use of funds from the National Welfare Fund, the size of which so far is 1.672 trillion rubles. According to him, 90 billion rubles. from the fund has already been transferred to Vnesheconombank, which placed these funds in shares and bonds of the most reliable issuers. The list of companies whose securities VEB is buying will be published in the Ministry of Finance’s year-end report, but now it cannot be disclosed in order to exclude insider information. According to market participants, VEB mainly buys securities of state-owned companies such as Gazprom, Rosneft, Sberbank and VTB. It is noteworthy that Mr. Dvorkovich does not recommend that the public sell the shares of these particular issuers. “I know what their plans and potential are - Gazprom, Rosneft, private companies that operate in this market. Investments in them, if the money is not needed in a week, in a month, in three months, are profitable and can bring results.”
The return on international reserves in annual terms for the ten months of this year was 3.9% for the dollar portfolio, 5.3% for the euro portfolio, 6.2% for the pound sterling portfolio, 0.4% for the yen portfolio, Chairman of the Bank of Russia Sergei Ignatiev said in the State Duma. At the end of 2007, INTERFAX reports, the return on foreign exchange reserves was 6.3% for the portfolio in dollars, 3.8% in euros, 7% in pounds sterling and 0.7% in yens. The drop in yield is due, as Mr. Ignatiev noted, to a significant reduction in rates by the US Federal Reserve and the Bank of England, as well as a change in the structure of Bank of Russia reserves in favor of more reliable instruments, such as government bonds and repo transactions.
The structure of foreign exchange reserves as of November 1 was as follows: 45% - dollars, about 44% - euros, 10% - British pounds sterling, just over 1% - Japanese yen. Gold and foreign exchange reserves are placed in five asset classes. The first class is foreign government securities and securities whose obligations are guaranteed by foreign governments. “This is the most reliable asset class, but also the lowest in terms of profitability,” explained Mr. Ignatiev. The volume of these assets as of November 1 amounted to $317.1 billion. The second class of assets are securities of federal agencies of the United States and some other countries, securities of international financial institutions. “The volume of this asset class as of November 1 was $52.7 billion, and its share decreased from 24.9% on January 1 to 12.9% on November 1,” says Mr. Ignatiev. According to him, from January 1 to November 1, 2008, the Central Bank reduced the volume of investments in bonds of American mortgage agencies Fannie Mae and Freddie Mac from $65.6 billion to $20.9 billion. The third class of assets is reverse repo transactions with non-residents. Their volume as of November 1 amounted to $72.1 billion, their share in the total volume - 14.9% (at the beginning of the year - 16.6%). The fourth class of assets are deposits and balances on correspondent accounts in foreign banks. According to the head of the Central Bank, the volume of this asset class as of November 1 was $19.7 billion. “Its share has decreased significantly - from 24.5% to 4.1%,” he noted. There is also a fifth class of assets - monetary gold, that is, the share of gold in bullion stored in Russia. Its volume as of November 1 is 507 tons, or $12.6 billion. “Despite the increase in the volume of monetary gold in weight terms, in value terms its share in gold and foreign currency reserves decreased from 2.7% as of January 1, 2007 to 2.6% as of January 1, 2008,” said Mr. Ignatiev.