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. Last Updated: 07/27/2016

Reserve Rates Raised To Aid Central Bank

Russia's Central Bank has announced it is raising reserve requirements for commercial banks to offset the effects of a law requiring it to transfer 5 trillion rubles (about $1 billion) of its reserves to the federal budget.


Central Bank chief Sergei Dubinin said Monday the government's move to use bank reserves for the cash-strapped budget jeopardized the bank's independence and could upset plans for financial stabilization.


"We're absolutely sure that this decision contradicts the Law on the Central Bank and the Constitution of the Russian Federation," he said, adding that the bank had appealed to the Supreme Court and the Constitutional Court.


He said, however, that the bank transferred the money Sunday to the Finance Ministry.


President Boris Yeltsin signed the law earmarking 5 trillion rubles of the Central Bank's 1994 profits for paying wages and financing the military-industrial complex last Friday after parliament swiftly passed the measure.


Dubinin warned that "people who contest the Central Bank's independence run a risk of renewed inflation, devaluation of savings and collapse of the foreign [exchange] market in Russia."


To counteract the inflationary effects of the 5 trillion ruble boost to the money, Dubinin said, the bank is raising reserve requirements for commercial banks to 20 percent from 18 percent on ruble deposit accounts of up to 30 days, and to 2.5 percent from 1.25 percent on hard currency accounts. The bank will also halt its Lombard credit operations, under which banks receive short-term loans from the Central Bank.


Dubinin said the measures will bring an additional 2 trillion rubles into the Central Bank's reserve fund.


"We will not allow any new inflation gush or any crisis on the foreign exchange market," Dubinin said, adding he expected monthly inflation in August and September to stay low. Russia's monthly inflation in May hit an all-time low of 1.6 percent.


Commercial banks complained that the decision effectively cancels a reduction of reserve requirements that took effect May 1.


"We're totally against the Central Bank's plan to put much of this burden on the shoulders of commercial banks," Zakharov said.


"In practice, this means that in the remaining 20 days, commercial banks will have to stop operations and accrue the 2 trillion rubles to pay it into the reserve fund," he said, referring to the July 1 due date for the next reserve payment.


Vladimir Kashin, deputy director of the Expert Institute at the Russian Union of Industrialists and Entrepreneurs, said the move signaled an attempt by the Central Bank to pressure the government through the banking community.


"The thinking there is, 'If you take a bite out of us, we'll do the same to you, but we'll use the banks because we can't do it ourselves,'" he said.


Overnight ruble credit yields jumped as high as 120 to 140 percent bid Monday from an early 35 to 60 percent, and some banks stopped quoting overnight altogether, Reuters reported.


Despite Yeltsin's signing of the law, Dubinin said he still considered the president and Prime Minister Viktor Chernomyrdin "powerful allies" in efforts to protect the Central Bank's independence and fight inflation.


The Central Bank has been at pains to maintain the tight monetary policy in keeping with a program that backs up a $10.1 billion International Monetary Fund loan.


The Central Bank in the past three months has issued 25 trillion rubles to the federal budget, a bank statement said. Some money was from foreign loans to the bank; some was in the form of Central Bank purchases of government bonds. Other budget revenue over the period was only 33 trillion rubles


The Central Bank said it was forced to sell more than $3 billion on the foreign exchange market to neutralize the effects of these emissions.