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. Last Updated: 07/27/2016

Central Bank Tries New Loan Scheme

In a new ploy aimed at bailing out Russia's moribund banking sector, the Central Bank is now handing out money to commercial banks under the guise of cheap overnight loans, traders and analysts said Thursday.

Central Bank Deputy Chairman Andrei Kozlov boasted in an interview with Kommersant Daily newspaper, published Thursday, that the Central Bank was driving down commercial interest rates by issuing banks overnight loans at the annualized rate of 40 percent. But, according to market watchers, the rate does nothing to make loans cheaper for commercial banks' clients f it is just a way to pump liquidity into banks. Interestingly, the Central Bank is borrowing the money back at higher interest rates on the bond market.

"If you look at the market for OBRs [Central Bank bonds], you will see the Central Bank is paying out 70 percent yields just when it's lending at 40 percent," said an analyst with the Rating Information Center. "The 40 percent rate is just for a few privileged banks."

When Russia had a lively interbank loan market, overnights f loans that are meant to be repaid the day after they are issued f were a means for banks to settle urgent debts among themselves. Now, the market is nonexistent because few banks have money to lend and, anyway, bankers have no confidence in each other. So why is the Central Bank still issuing overnight loans?

Analysts say the only thing the Central Bank loans have in common with the overnights of old is the name. According to Alexei Zabotkin, an analyst with United Financial Group, banks cannot repay the loans the day after they receive them, so the Central Bank just rolls over the credits.

As for the 40 percent rate, Zabotkin said the Central Bank had set it arbitrarily. In the absence of benchmark ruble instruments or an interbank lending market, the rate must be artificial, he added.

It is not clear when the banks started receiving the "overnights." The lending is likely to continue until a decision is reached on restructuring the government's domestic debt, in which a substantial part of the banks' liquid assets was parked, he said.

Since the Aug 17. debt default, the Central Bank has taken several controversial measures to bail out banks. It lent them substantial sums of money, accepting their worthless treasury bills as collateral, and later presided over a debt swap in which many bank debts were mutually offset and others were paid out of the banks' mandatory reserves.

The Central Bank has had trouble getting some banks to reveal their debts, but it has consistently refused to name these delinquent banks, giving rise to suspicions that it was shielding politically connected financial institutions instead of declaring them insolvent. Analysts said these same banks could be getting the new loans now.

In his Kommersant interview, Kozlov did not reveal who the recipients of the loans were. The Central Bank's press service refused to comment Thursday on the overnights.

The Central Bank on Thursday set the ruble-dollar exchange rate at 15.82 based on morning trade on the Moscow Interbank Currency Exchange. Trade volume in the morning session for exporters and importers grew to $96 million from Wednesday's $50 million.

In the afternoon session, from which exporters are barred, the rate reached 16.07 rubles per dollar.