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. Last Updated: 07/27/2016

Striking a Ruble-Dollar Balance

One week ago, for the fourth time this year, the Central Bank announced a change in commercial banks' reserve requirements. It must be said straight away that frequent changes in reserve requirement policy are not in character for a nation with a firmly established monetary system. But according to Central Bank Chairman Sergei Dubinin, the newly announced changes should be the last for quite a while. Dubinin promised commercial banks a certain degree of peace in this area. "Every decision to change reserve requirements we make with reluctance," he said.

The year's first change in reserve requirements was made in the spring, when they were lowered. Some took this as a gift from the new bank chairman in the time leading up to the Association of Russian Banks' congress, as well as a counterbalance to former bank head Tatyana Paramonova's sharp but necessary 1995 increases in reserve requirements. Some hailed the reduction in reserves as the beginning of financial stabilization.

In any case, the Central Bank management was mistaken in their optimistic prognosis. Elections were around the corner and ruble emissions had piled up. After what was perhaps the first cooperative wielding of force by the government and the State Duma, when they forced the Central Bank to print 5 trillion rubles to reflect the bank's 1994 profits, the bank's board of directors decided to tighten reserve requirements once again. I do not know whether the deputies understood that the economy is subject to the law that "for every profit there must be a loss," but the bankers were furious. Having relaxed after April's gift from the Central Bank, they were caught off guard. However, a short time after the elections, the Central Bank -- having employed various means to reduce excess money supply -- returned reserve requirements to their pre-election levels.

This time around, ruble and hard-currency reserve requirements were changed in diametrically opposite directions: Ruble reserve requirements were lowered, but requirements for foreign currency were immediately doubled. The Central Bank's management contended that the general volume of banks' liabilities, frozen in Central Bank reserves, would for all intents and purposes change very little. The fact is that banks' ruble to hard-currency liabilities are currently at a 5:2 ratio. These changes, the Central Bank reasoned, were supposed to keep total reserve levels static.

Indeed, the total reserve level has not changed. For individual banks, the new reserve requirements led to relaxed discipline, in some cases, and new problems in others. For banks working primarily with hard-currency clientele -- mainly foreign financial institutions' subsidiary banks -- reserve requirements became twice as severe. For banks that work primarily with the ruble -- chiefly average- and smaller-sized banks -- the new requirements meant the return of reserves that were previously unavailable. But foreign banks' subsidiaries were not the only ones numbered among the casualties. Vneshtorgbank and the Moscow International Bank also suffered, as well as a certain number of Russia's large commercial banks that work with exporters. It isn't necessary to list them by name -- one need only look at the top few lines of any rating of Russian banks. For many, the blow could be quite painful.

Many bankers, who prefer to remain anonymous, are of the opinion that the policy of required deductions from hard-currency minimum-deposit accounts will result in direct losses for the banks. While a banker can talk of missed profit opportunities when handing over a portion of his ruble accounts into a reserve, it is an altogether different issue when it comes to hard currency. A bank must change part of its hard-currency holdings into rubles at its own expense -- the Central Bank does not accept dollars. Then, when a client makes a withdrawal, the Central Bank manages to depreciate the money as it comes back out of the reserve, and the bank must cover the difference from its own coffers.

Why did the Central Bank decide on such drastic measures? Naturally this was not a way to fight the growing presence of foreign banks -- for whom this was only a drop in the bucket -- on Russia's financial markets. The total capital of foreign banks is far from the upper limit of 12 percent of the total capital for Russian banks. According to Dubinin, in the last little while, the Central Bank has become concerned about a slowing trend in the "depolarization of the economy." The fact of the matter is that for a substantially long time, it has been more profitable to keep funds in ruble accounts than in hard-currency accounts. Russian banks have raised interest rates on ruble deposits. As a result, businesses as well as private individuals have been more eager to save their money in the national currency. Beginning approximately at the start of the summer, this picture of good tidings for the Central Bank began to fade. The relatively fast devaluation of the ruble led to a situation where it was more profitable to keep one's savings in hard currency. Sensitive to changing conditions, commercial banks reoriented themselves and interest rates on hard-currency accounts began to climb. The most recent change in reserve requirements was implemented, in particular, to make hard currency less attractive.

The Central Bank's managers have told commercial banks that they would consider the situation normal if ruble and hard-currency reserve levels were to coincide. This is far from the way things are now. The banks must meet reserve requirements of 5 percent of their currency liabilities and from 12 percent to 16 percent of ruble liabilities, depending on the type of account. So, although bankers have been promised a peaceful existence, only time will tell how much it will cost. One thing is certain. Banks serving hard-currency clients should be prepared to know that these operations will become more and more expensive.

There is still one other interesting aspect of the newly announced decision. As is well known, by raising or lowering reserve requirements, Central Bankers are controlling the country's money supply. One fact is clear: The amount of dollars, according to some estimates, exceeds the amount of rubles in circulation, forcing the Central Bank to sock away its reserves in another nation's currency.