Central Bank Offers Sources for Liquidity

The Central Bank said Monday that new funding sources could be open to banks starting next month, as available resources were squeezed by month-end tax payments and supporting the ruble, pushing money market borrowing costs to one-week highs.

With an estimated 460 billion rubles ($17 billion) in tax payments due this week, Renaissance Capital stated, pressure is set to rise on a banking system already hard-hit by the global credit crunch and a flight of foreign capital.

In the future, new funding avenues may ease the strain.

Alexei Ulyukayev, the Central Bank's first deputy chairman, said Monday that six-month, collateral-free loans and repo auctions with share collateral could begin next month, while an agreement on partial compensation of banks' losses from interbank operations may be signed this week.

Overnight interbank rates were fixed at a one-week high of 10.75 percent, bids at the day's first repo auction exceeded the 300 billion rubles on offer and banks snapped up nearly all the money offered in collateral-free loans by the Central Bank.

The Central Bank also upped the daily limit on currency swap operations to 150 billion rubles ($5.56 billion) on Monday, a 15-fold increase from Friday's cap.

"That is how we see the liquidity situation ... including the effect of taxes," said Ulyukayev, when asked about the increase in the limit on the swaps.

Dealers said exporters were converting foreign earnings to cover their taxes owed, offering support for the ruble.

The ruble strengthened as far as 30.33 against a basket of 0.45 euros and 0.55 dollars, but the recovery did not last. It closed at 30.39, near the 30.41 level that the Central Bank has defended with dollar-selling interventions in recent weeks.

The Central Bank introduced the limits on daily currency swap operations last week as it bid to discourage currency speculators from betting on ruble depreciation.

The limit was originally set at 50 billion rubles and then was cut gradually to reach 10 billion rubles on Friday before Monday's sharp increase.

"It cannot be ruled out that the swap limit will be reduced [again] in the coming days," said Yevgeny Nadorshin, an analyst at Trust Bank.

Dealers estimate that the Central Bank sold $13 billion of Russia's over $500 billion gold and foreign currency reserves to prop up the currency last week and a further $2 billion to $3 billion on Monday.

Officials say a devaluation is not in the cards, but analysts believe that Moscow may have to capitulate because of plummeting budget revenues from oil exports and capital flight that mean it cannot defend the currency forever.

"The party is over," Danske Bank said in a research note Monday, also slashing Russia's 2009 growth outlook to 2.5 percent and forecasting a mild depreciation of the ruble.